Photographer: David Paul Morris/Bloomberg

markets

San Francisco’s Sky-High Office Rents to Slip

  • High-rises are starting to meet space demand of tech giants
  • Sublease supply fueled by companies leaving old digs for new

San Francisco’s office market is catching up with the relentless expansion of tech companies as a surge of construction nears completion, a sign rents may cool in one of America’s priciest cities.

More than 5 million square feet (465,000 square meters) of office space will be completed in 2018, about as much as in the past three years combined, according to CoStar Group Inc. That includes the 61-story Salesforce Tower, the new home of Salesforce.com Inc., and 181 Fremont, a building around the corner that has been mostly leased to Facebook Inc.

San Francisco Office Vacancies on the Rise

Ten million square feet of office space under construction at close of 2017

Source: CoStar Group Inc.

Even as tech giants snap up large blocks of new space, office rents are flat and are poised to come down, according to CoStar. It doesn’t help that the amount of space listed for sublease has climbed to 3.3 million square feet, the highest level since 2009.

“Sublease space is offered at a discount, and that is putting a little dent in rental rates,” said Jesse Gundersheim, a market economist with CoStar.

The supply of sublease space is fueled by tech companies, such as Salesforce, that are moving into new headquarters and putting their old offices on the market, as well as by companies such as Twitter Inc. whose real estate needs have fallen short of their planning, according to Gundersheim. Other tenants are decamping to cheaper markets such as Oakland, he said.

Rents for top-tier office space in the metro area are forecast to fall 0.9 percent this year, to $63.80 a square foot, the lowest since 2014, according to CoStar, which ranks the San Francisco metropolitan region as the most expensive in the nation. Overall rents are expected to change little this year and to drop 1.4 percent in 2019 and 3.5 percent the next year, with vacancies climbing above the U.S. metro average of about 10 percent.

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