Square Joins Tech Firms Subleasing San Francisco Offices

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Square Adds to the Sublease Spike in San Francisco

Square Inc. is putting part of its San Francisco headquarters space on the market, joining a growing number of technology companies subleasing offices in the city after planning for future expansion.

Square, the mobile-payments company co-founded by Twitter Inc. Chairman Jack Dorsey, is offering for sublease 50,000 square feet (4,600 square meters) on two floors at 1455 Market St., according to brokerage Savills Studley Inc. In the same building, Rocket Fuel Inc. put 50,000 square feet on the market earlier this year.

San Francisco, where the technology industry has dominated office demand and sent rents soaring, leads the U.S. in sublease space as a percentage of total vacancies, according to Cushman & Wakefield Inc. The share jumped to 13.5 percent in the first quarter, the highest since the financial crisis, from 9 percent a year ago. While the city’s commercial real estate market is among the nation’s strongest, subletting can be an indicator of companies getting too ambitious about their growth prospects.

Companies such as Square leased more space than they needed to ensure they have offices to grow into in a few years, said Matt Hart, senior managing director for Savills Studley. Because Square signed the lease when the market was less expensive, the company can rent its excess space for more than it’s paying.

Colleen Murray, a spokeswoman for Square, declined to comment on the company’s sublease offering. Square has 250,000 square feet at the Market Street building, which it leased almost three years ago.

Market Risk

Lookout Inc., a mobile-security company, has put 10,000 square feet on the market at One Front St. with a similar strategy of banking space for expansion, Hart said. The risk is that when the space becomes available again, the companies many not need it or demand from other tenants won’t be as strong.

“You can draw a parallel to this from 2007, when people were doing interest-only loans and in 2010 there was no one there to fund the loan again,” Hart said. “Two, three years down the road, when these subleases expire, there may not be” demand for the space.

Heather MacKinnon, a spokeswoman for Lookout, declined to comment.

‘A Bubble’

An increase in subleases can be seen as an early warning sign for the real estate market that companies are retrenching. A bubble has formed in San Francisco that has made price gains unsustainable, said Glenn Kelman, chief executive officer of brokerage Redfin Corp.

“There’s a bubble,” Kelman said in an interview Friday on Bloomberg Television. “There are prices that are too high on companies. There are prices that are too high on real estate. As interest rates go up, you’re going to see a contraction.”

Prices for both commercial and residential real estate in San Francisco have climbed so far that companies are evaluating locations in other cities to lower costs, Kelman said.

Total sublease space on the market in San Francisco stands at 1.4 million square feet, with 956,000 square feet of that located in the north and south financial districts, according to Savills Studley. That number is poised to grow because Charles Schwab Corp. is planning to sublease out 300,000 square feet at 215 Fremont St. as it consolidates at another building in the city, Hart said. A Schwab spokesman didn’t return an e-mail seeking comment.

Zillow, Zynga

Salesforce.com Inc., Crunchyroll Inc., Zillow Inc. and Sega of America Inc. are also offering space for sublease, according to Savills Studley. Zynga Inc. last year leased part of the building it owns to Practice Fusion Inc., an electronic medical-records company.

Kelly Pakula Kunz, a Zynga spokeswoman, and Jill Simmons, a Zillow spokeswoman, declined to comment. Representatives for the other companies didn’t respond to e-mail messages.

San Francisco space offered for sublease is still far from the peak of 2.2 million square feet in 2009, during the recession, according to Cushman & Wakefield. And demand for offices remains robust, with some space being subleased because tech tenants have grown rapidly and moved to larger quarters elsewhere, CBRE Group Inc. said in a report.

Most of the commercial buildings under development in San Francisco “are going to be delivered in mid-2016 through 2018, and the buildings that are going to be delivered in 2016 are all leased,” Hart said. “And they are all leased by tech companies.”

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