San Francisco's Office Space: Winners and Losers

San Francisco and several other West Coast cities are currently facing a visibility problem when it comes to office spaces. While the demand for top-tier office space with stunning skyline views has remained strong even after the pandemic, the outlook for the rest of the floors is far from promising. This situation has cast a cloud over even the most prized office buildings, as it has been almost four years since COVID-19 forced people to leave downtown areas.

Barry DiRaimondo, the co-founder and chief executive of real estate developer Steelwave, explains the current divide as a battle between winners and losers. Only about 10% of the office space supply falls into the winners category, while the remaining 90% finds itself in the losers' camp.

Steelwave has been closely monitoring office leasing activity in various markets where it operates as an owner. They have also been keeping a close eye on what's happening in San Francisco as tenants at 101 California, a recently renovated 48-story office tower situated in the heart of the financial district.

George Clever, the city head of San Francisco for Hines, a global real estate investment firm that owns 101 California, highlights that demand for upper floors has remained strong among tenants. This consistent demand has contributed to keeping the property occupied at around 80%.

However, Clever points out that leasing activity for middle and lower floors has remained stagnant. Therefore, it is difficult to predict where the overall rents for San Francisco office properties will eventually settle, despite a series of notable distressed sales this year.

Data from VTS, a global office-leasing activity tracker, underscores the increasing demand for premium office spaces in San Francisco.

The Power of Views: A Unique Trend in San Francisco's Real Estate Market

In the bustling city of New York, tenants are rushing to secure spaces in prestigious trophy buildings. However, in San Francisco, it is the breathtaking views that are capturing the attention of potential occupants. According to Nick Romito, the co-founder and CEO of VTS, the presence of remarkable vistas sets San Francisco apart from other cities.

Nationally, landlords continue to grapple with a surplus of vacant spaces. In San Francisco, the overall vacancy rate in the third quarter stood at a historically high 34%, soaring to a staggering 47% for lower-quality, Class B office spaces in the financial district, as reported by CBRE.

Colin Yasukochi, a tech-focused researcher at CBRE, explained that high-quality spaces with magnificent views enjoy a much lower vacancy rate of around 10%. This explains why rental prices remain remarkably high in such buildings. In fact, prime office spaces can reach astonishing rates of up to $200 per square foot. CBRE Research also discovered that the demand for top-quality spaces has widened the rental price gap, currently sitting at 52.4% between buildings with prime views and those without. This represents a significant increase from the 15.2% gap observed in 2019.

Interestingly, tenants willing to pay top dollar often choose to occupy smaller spaces to maintain stable office costs while still enjoying stunning views. Colin Yasukochi attributes this trend to the rising popularity of hybrid work models.

Rob Kane, the CEO of Lincoln Property Company, a global commercial real estate firm, affirmed that this phenomenon is not exclusive to San Francisco. He stated that on the entire West Coast, companies are consistently downsizing their office spaces while seeking accommodations in superior buildings. This ongoing trend continues to shape the real estate landscape.