Rates have dropped about 20% since the beginning of the year. Sublease space affects asking rents, because subleases are typically priced about 15% below market and provide potential tenant furniture, wiring etc which limits their out of pocket expenses. As stated below, how much sublease space hits the market definitely provides a pulse of how businesses in the area are fairing and is a good indicator of future rent drops.
San Francisco tenants unloaded another 250,000 square feet of unwanted office space onto the market in January, as employers slashed
workers and pushed to generate sorely needed cash by subleasing floors in Class A downtown towers.
Companies adding to the avalanche of available sublease space include Charles Schwab, which said Jan. 30 that it would cut 500 to 600
jobs in the first quarter. Schwab is seeking a subtenant for 80,000 square feet at the 1 Montgomery Tower. Also in that building, Thomas
Weisel Partners Group is looking to sublease 20,000 square feet on the 35th floor, billed as a “high-end build out with panoramic
views.” Other chunks of sublease space coming available include 15,639 square feet of brand-new space at the just completed 555 Mission
St. being subleased for $48 a square foot by law firm DLA Piper, and the entire 22nd floor of 345 California St., former UBS space that
Cushman & Wakefield is looking to lease for five years at a rock-bottom $27 a square foot.
The onslaught of new leasing opportunities for tenants is depressing leasing rates, according to Studley, a tenant representative
brokerage. After years when average Class A space hovered around $50 a square foot, $40 a square foot is becoming the new “high water
mark” with $30s the “norm,” and some top-quality sublease dipping into the $20s. Studley says the central business district could see
another 1 million to 2 million square feet of sublease space on the market this year, added to the 1.2 million that came on in the second
half of 2008.
“I can’t imagine things getting markedly better this year,” said Steve Barker, an executive vice president at Studley.
Unemployment up
The number of unemployed San Francisco residents grew by 10,300 in the fourth quarter of 2008 to 29,500, according to Ted Egan, chief
economist for the City of San Francisco. In spite of the fourth-quarter increase, Egan pointed out that the 10,000 jobs eliminated during
the final three months of 2008 came in dribs and drabs rather than the sort of en masse layoffs announced in recent days by Charles
Schwab and Macy’s, which announced 1,400 San Francisco layoffs on Feb. 1. A loss of 2 million square feet of occupied space equals about
10,000 workers.
“Now we are starting to see major layoffs from major employers,” said Egan. “This is the sign of the recession coming to San Francisco.”
Daniel Cressman, an executive vice president with Grubb & Ellis, said the overall sublease activity pales in comparison to the last
downturn of 2001 and 2002, when 6 million square feet of space hit the central business district. Still, he expects several more quarters of
negative absorption, which occurs when more companies are giving up space that leasing it.
“For the commercial real estate community, sublease space is the canary in the coal mine that tells you the general health of the San
Francisco economy,” said Cressman. “Things are not great right now, but they are not that bad.”
Leading the group of firms cutting their footprints are financial services firms and banks, including UBS, Citigroup, Thomas Weisel,
Bank of America and Charles Schwab. The other top group is law firms, which have given up some 500,000 square feet of space. Failed
firms Heller Ehrman and Thelen Reid accounted for 350,000 square feet at 333 Bush St. and 101 Second St. combined. Meanwhile, other
law firms expected to join the hunt for subtenants include Dewey & LeBoeuf, which announced plans Feb. 3 to close its San Francisco
office at One Embarcadero Center.
Thus far, San Francisco tech companies have been mostly absent from the sublease parade, although H5, a company that provides
information retrieval for the legal industry, recently put a floor up for sublease at 71 Stevenson St. And brokers say Slide will put the
fourth floor of 301 Brannan St. on the market shortly, asking in the low $30’s for an 18-to-24-month term.
Anton Qiu of TRI Commercial, who leases 71 Stevenson, characterized the space H5 is seeking to sublet as an “expansion floor” and said
he is not concerned.
“We are 99 percent leased, and all our tenants are doing well and have long-term leases,” he said. “Obviously, we don’t like to see it, but
overall H5 is doing well.”
Much of the damage is yet to come, according to brokers. A Macy’s spokesman said it would probably be months before it figured out
what to do with its San Francisco offices, which includes 100,000 square feet at 22 Fourth St. Macys.com, which inked a 70,000-squarefoot
expansion at 685 market St. in 2008, was not included in the Macy’s layoffs, the spokesman said. Scott Harper of Colliers
International, who leases 685 Market St. for owner Prudential, said the Macys.com expansion just closed in December.
“We don’t think it’s going to impact our space at 685 Market, but we don’t know for sure,” said Harper.
Charles Schwab CEO Walter Bettinger said Jan. 30 that the company expects “with almost certainty” another round of layoffs this year.
“We are taking a balanced approach to the near term and the long term and we’re simply not going to allow ourselves to become
uncompetitive,” Bettinger said.
The new subleases are creating opportunities for tenants looking for swank offices already built out with sleek furniture and wired for the
latest technology. Many of the chunks of sublease space available are in San Francisco’s best buildings, including Four Embarcadero
Center, 101 California St., 555 California St. and Tishman Speyer’s new highrise at 555 Mission St.
“There are plenty of options out there for high-end sublease space in trophy buildings,” said Barker. “Off the top of your head you can
name eight or 10 of them.”
The trend does not bode well for landlords attempting to lease out shell space. Barker said no tenants are interested in “funding a buildout.”
“There are too many built-out options to consider,” he said.
Despite the lower costs, deals are few and far between. Studley Executive Vice President Kevin Brennan said many building owners have
yet to lower prices enough to make deals happen.
“As the landlord community starts to capitulate, you’ll see more transaction velocity,” said Brennan. “As of now, they have not capitulated
yet.”
San Francisco Business Times – by J.K. Dineen jkdineen@bizjournals.com / (415) 288-4971
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