San Francisco Sublet Supply is Rising but Offers Little Relief on Rents

Market Insights
February 12, 2016

Colin ScanlonResearch Manager

Available sublet space in San Francisco was approaching nearly 1.7 msf at year’s end. Highly improved long term sublease spaces are moving fast as well, and we are not seeing much of a discount, if any, from direct space. Tenants seeking full-floors or blocks of 50,000 sf or more are still encountering challenging conditions. Small to mid-size startups are feeling the most pressure. Space in the 3,000 sf to 10,000-sf range doesn’t sit long, and these firms are the most heavily scrutinized by landlords.

Other big blocks to hit the market include Neustar’s 87,000 sf space at 505 Howard, Yahoo’s 61,000 sf at 343 Sansome, RockYou’s 44,000 sf at 303 2nd St, Advent Software’s 44,000 sf at 600 Townsend, Zenefits’ 20,000 sf at 303 2nd St, TeaLeaf Technologies’ 28,000 sf at 55 2nd St, and Riverbed Technology’s 18,000 sf at 680 Folsom. Also notable, Zynga is getting creative with its excess space. The mobile gaming company is quietly shopping 250,000 sf of excess space at its HQ at 650 Townsend, while at the same time is marketing the building as a sale leaseback opportunity to investors in an effort to capitalize on the high trade value of office assets in San Francisco. RocketFuel had been shopping 50,000 sf for sublease at 1455 Market St, but the new owner (Canada Pension Plan) allowed them to terminate, with hopes of replacing them with a higher market rent.

Owners are clearly taking credit risk more seriously in this cycle. Well-established tech firms, banks and law firms can sometimes get a few additional options or win the contest for space, beating out less established firms that do not have the track record. There is nothing new about the questions that many of the startups are being subjected to – this includes those that have successfully completed big funding rounds. Investors want to know what their monthly burn rate is and when they expect to become profitable. The difference of late is that investors are being tougher in their assessments.

In general though, concessions remain below what they were a year ago. That said, the dynamic is shifting a bit as it becomes clearer that the end of the rally could be getting closer.

This time last year and certainly in late 2013 as well, landlords with big lease rollovers or those offering newly converted/constructed creative sector office space were on top of the world. Owners with near term lease rollover, through the first half of 2016 are still optimistic. In contrast, landlords with 2017 and 2018 rollover are little less certain and may not be as inflexible regarding lease renewals.




Read Our San Francisco 2015 Q4 Office Sector Report

San Francisco’s remarkable rally may be approaching its upper limits as more investors short tech stocks and negligible supply pushes more tenants to Oakland, the Peninsula and points beyond. It remains to be seen whether the turbulent end to the year will carry into 2016.

2015 Q4 San Francisco Office Sector Report



Colin Scanlon

Colin directs Savills Studley's Northern California real estate analytics. He conducts research and analysis to further strengthen the firm's position in negotiations with landlords, including tracking lease comparables, tenants in the market, construction projects and employment conditions.