By Cameron Love

A bastion of public technologies companies with robust financial standing and ever-rising market capitalizations, coupled with a widespread startup culture of growth at all costs, converging on a city with a supply constraint and highly regulated development policies has created a perfect storm—turning San Francisco into the most expensive city in the country for office space. Yet, there are signs of that storm passing and clearer skies for San Francisco’s corporate occupiers may be on the horizon.

The San Francisco office market is vulnerable to “softening,” or even a near term correction due to a shift both in the public and private capital markets. There are countless examples signaling that investors are now focused on tech firms’ profitability path, and not just their growth path. Take a handful of San Francisco based venture-backed companies who recently went public—Lyft, PagerDuty, Slack, Uber and DocuSign. All five companies experienced share price trends that were on par or outpaced the S&P 500 prior to mid-August. Since then, all five reported net losses in their latest quarterly earnings and all but DocuSign have seen a significant decrease in share price. Should this trend, and valuation slashing in the private markets continue, San Francisco may well see a near term rightsizing of potentially 15-25% or multi-millions of square feet in increased supply via subleases, or space give backs.

For instance, WeWork, the workplace as a service giant, experienced a tumultuous quarter to say the least. Spurred by a failed initial public offering in September, an 85% decrease in its private market valuation and an overhaul of an executive team, the company’s future is now in question. WeWork had amassed a leased portfolio of flexible office space totaling 1.5 million square feet in San Francisco over the past eight years. As 2% of the total office inventory, the spotlight will be trained on how the companies new management handles its escalating lease obligations.

Since July, Uber has laid off over 1,000 employees in an effort to reign in cascading losses and chart a course toward profitability. As the company sets to open its new global headquarters in Mission Bay next year, it announced last week a plan to begin subleasing efforts to offload 725,000 SF of leases across four buildings on Market Street.

In other recent news, Stripe, the payment processing unicorn, announced it would be moving its operations 10 miles south, to South San Francisco. Reportedly motivated by San Francisco’s high cost of living, a gross receipts tax on corporations passed just last year and the squeeze on large contiguous space availability, Stripe’s 300,000 SF office on Townsend Street could be another drop in the bucket of sublease space to hit the market in 2020.

Also in announced in October, a major development in the East Cut has halted construction. It’s first project in San Francisco, Oceanwide, a Chinese developer, was nearing completion of the below grade foundation for a 54-story office and residential tower and a second structure planned for a hotel use, without a local partner. Their plan has now changed, citing “local market changes and economic uncertainties” will require a “realignment of work scope… to keep the project sustainable.” Due to the scale of the project and its central location adjacent to the Transbay Terminal, the next chapter of this story will be important to follow. Take your bets now, whether a local developer steps in to form a joint venture or if a corporate user will grab the baton to secure an additional 1.1 million square feet in 2023.

While the potential rush of new sublease availability and space give backs will likely appease demand in the short term, especially for big block requirements of 100,000 square feet and up, the larger unknown and arguably more important question left to be answered is if the shift in investor priorities will have a lasting effect within the City’s tech community, and greater Silicon Valley?  As we near the end of the largest growth cycle in the history of our country, the forecast is certain to change at some point.

Third Quarter Transactions of Note:

– WPP (AKQA) – renewal/expansion – 115,000 SF at 360 3^rd Street
– Reddit – relocation/expansion – 78,031 SF at 1455 Market Street
– Benefit Cosmetics – relocation – 74,602 SF at 595 Market Street
– Reed Smith – renewal – 63,317 SF at 101 2^nd Street
– Brex – relocation/expansion – 60,593 SF sublease from Mixpanel & Knotel at 405 Howard

Interested in reviewing market statistics? View them on the attached report provided via CoStar.