Pinterest may have abandoned a big new San Francisco office project, but that doesn't mean other tech companies are about to flee the industry's epicenter
It's still unclear how the coronavirus crisis will affect the commercial real estate market in San Francisco, experts say.Pinterest's recent decision to abandon a massive new office project isn't necessarily a bad sign for San Francisco that the tech industry is going to leave.
Vacancy rates are up in San Francisco and the amount of space being offered for sublease is at record levels, due in large part to the coronavirus crisis.But San Francisco retains some significant advantages that should buoy its commercial real estate market after the pandemic passes, experts said.Pinterest may have just abandoned a massive office project in San Francisco, but people shouldn't hear in that a death knell for the city's days as the center of the tech industry. While vacancies are rising, there's little current new leasing activity, and other companies have put projects on hold, it's still too early to tell just how the coronavirus crisis will change the office-space market in the City by the Bay, commercial real estate experts told Business Insider. And there are good reasons to think that demand from tech companies and others will return as soon as the pandemic passes, they said. Among them: there remains a huge number of highly trained tech and biotech workers in the area. "The fact is — our advantage more than any other is — we do have that dense talent pool in the area, no matter how this shakes out," said Robert Sammons, a senior director of Bay Area research for real estate brokerage Cushman & Wakefield. The onset of the COVID-19 pandemic cooled the previously red-hot San Francisco office market. Prior to this spring, the city's vacancy rate of 5.4% was the lowest of any major market in the country, according to Cushman & Wakefield's data. Rents were in the mid-$80 range per square foot — the highest in the country. But San Francisco and the surrounding region was the first in the nation to shut down to try to prevent the spread of the new coronavirus. Unlike other areas of the country, it's remained largely locked down since.Area businesses, particularly in the tech industry, were early adopters of work-from-home policies. Many have announced delays in reopening their offices and extended their support for remote work well into next year. And some companies, including Facebook, Twitter, and Square, have announced they'll support working from home on a permanent basis. With few workers coming into the office, the national economy in recession, and many tech companies laying off workers, vacancies soared to 12.5% in San Francisco by the end of July, according to Cushman. That's the highest level since the dot-com bust in the early 2000s, Sammons said. Meanwhile, the amount of space that corporate occupiers are trying to sublease has also jumped, more than doubling from 2.3 million square feet at the end of 2019 to 5 million, or about 6% of all available office space, at the end of July. The amount of space up for sublease is the highest on record and actually surpasses what was available after the dot-com collapse, said Colin Yasukochi, a market analyst at brokerage firm CBRE and the executive director of its Tech Insights Center.With companies uncertain about the future, they're less likely to want to sign new deals for space. Pinterest'sNew leases have plunged Additionally, the number of new leases that companies are signing has fallen off a cliff. In the Bay Area as a whole, leasing activity was down 75% in the second quarter compared with the same period a year ago, according to CBRE's data. By comparison, leasing activity nationwide was down 44%. Despite all that, prices in San Francisco have held up and remain north of $80 a square foot, according to Sammons. But that's mainly because there's been so little leasing activity. "There's been so few transactions, there's been no mark-to-market yet," he said. "Because of that, there's just been no price discovery at this point." It's still unclear how things will shake out. Companies have taken this time to evaluate their office space needs, Yasukochi said. But they likely won't make any decisions until they reopen their offices and see who shows up, he said. "The vast majority of them are really still evaluating it and don't know what their permanent plan is going to be, because it's too soon to know," he said.Still, as bad as things look right now, Sammons and Yasukochi both pointed to silver linings. The amount of sublease available is boosted by space that was made available before the pandemic struck and had nothing to do with the virus's impact, Sammons said. In particular, Uber moved its headquarters and is trying to sublease out its former space, he said. While the overall amount of sublease space available harkens back to the dot-com disaster, there's a big difference, Yasukochi said. In that case, much of the space was vacated by nascent dot-com startups that went belly up. Today, much of the space is being abandoned by bigger, well-financed companies. Unlike their dot-com predecessors, they're expected to continue making rent payments.While some areas of the tech industry were hit hard by the crisis, including travel companies such as Airbnb, others, such as DoorDash have seen surging demand. Once the pandemic passes, there's a good chance those fast-growing companies are going to want office space, the experts said. And because of all the highly trained workers that continue to live in the area, they'll likely want it here. While it's likely that more people will work remotely or from home after the pandemic than did before it, there's still going to be a need for spaces where tech employees can come together to collaborate and work together on projects, Sammons said. The need for space is particularly acute in the biotech industry, which has become increasingly to San Francisco's corporate real estate market, he said.And the increase in vacancies and expected downturn in prices could end up being a good thing for the local economy. Many startups and even well-financed companies were finding it increasingly difficult to find or afford space in the area. The downturn could make it easier for them to set up shop and stick around, the experts said. "In an odd way, the fact that we now that have more vacancy, more availability, and what will be a lower price pointContact Troy Wolverton via email at twolverton@businessinsider.com, message him on Twitter
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