Bubble Mentality Collapses in San Francisco Office Market

Tough business decisions loom.

The rumored second round of layoffs at Twitter – which in 2011 was granted by the befuddled city of San Francisco the “Twitter tax break” on employment taxes – comes at a very inopportune moment for the glory of commercial real estate. These layoffs would amount to 8% to Twitter’s workforce, or about 300 people, according to Bloomberg.

Already, Twitter has thrown 183,642 square feet of vacant office space at its two-building Mid-Market headquarters on the sublease market, thus bringing it to 1.51 million square feet (msf).

This comes at a time when, according to the “snapshot” from Cushman & Wakefield, leasing activity nearly ground to a halt in the third quarter, with only 875,000 sf leased – the lowest since 2001!

There was only one major lease deal over 100,000 sf: Amazon’s live streaming video platform Twitch, which took 178,000 sf. The next largest deal was less than half that size: WeWork leased 78,000 sf.

Leasing activity for the three quarters this year plunged 30% from the same period last year, to just 4.7 msf, according to a report released this week by commercial real estate services firm Savills Studley, which added dryly, “The competition for space has calmed dramatically from several quarters ago.”

And there is a lot of new supply coming on the market, according to Cushman & Wakefield: currently, 3.8 msf of office space are under construction, with 31% preleased.

Overall vacancy rose 0.7 percentage points from the prior quarter to 9.0% in Q3, according to Savills Studley. In Class A buildings, availability jumped 1.1 percentage points to 10.4%. Some areas were still red-hot, but others are turning cold: In the SOMA area, there were practically no vacancies (1.0%). But at the other end of the spectrum, vacancies at the Financial District South spiked 2.5 percentage points to 12.3%.

Overall, the San Francisco office market, though it has turned the corner, is still tight, compared to the 17.9% vacancy rate of the US index

As leasing activity has ground into slow-motion, with demand fizzling and companies waiting for rates to drop, while landlords still try to hold on, overall office rents edged up 1.4% to $65.20 per square foot. For Class A buildings, rents rose by 0.9% to $66.75/sf.

In some submarkets, rents are still rising: at one end of the spectrum, Financial District North, rents rose 2.3% from a year ago, very tepid by San Francisco’s explosive standards. But in other submarkets, rents are coming down: at Jackson Square (the area just north of the Transamerica Pyramid, one of the oldest commercial areas) rents fell 4.7%, and at Rincon/South Beach rents fell 2.4%, with Class A rents down 5.2%.

How tough is it for businesses to make these sky-high rents work? Charles Schwab’s entire 435,000 sf headquarters building is up for lease. The lease expires in May 2018, and Schwab hasn’t renewed it yet. It’s contemplating moving at least some of its operations to cheaper areas and states, including North Texas. Other companies have already moved out of San Francisco, and others are working on it, including Uber, which is moving across the Bay.

The rate of $65.20/sf in San Francisco is about double the US index of $33.82/sf. And that’s part of the problem. Because it’s not a perfect world anymore.

The office sector in San Francisco is dependent on the startup boom, the stock market, the IPO market, the rush of global money, and exuberant optimism in the VC community that this is going to work out somehow, that these startups in bio tech, medical devices, social media, ad tech, fin tech, travel tech, and beer-home-delivery tech are going to be unicorns someday, and that enough of these unicorns are actually going to fly.

That’s where the money comes from to fund companies with big cash drains that hire lots of people and lease a lot more office space then they’ll ever need in the hope of growing into it as they soar along their exponential growth curve on their way to disrupting dinner as we know it.

But when VCs and other investors suddenly get skittish, as they did last year and earlier this year as IPOs were drying up, they tighten their purse strings, and some startup shut down while others are laying off people and are putting expansion plans on hold. Valuations have fallen from crazy levels to still crazy levels. More mature companies, like Twitter, have run into the wall of reality where dreams go POP. And others are moving to cheaper pastures.

But all the fretting appeared to settle down this spring and summer. Stock markets became perky again, some IPOs started flying once again off the shelf in September, mid and later-stage startups were able to secure funding, thus creating some support for office space, and the hope is that the office sector would escape a total rout this time.

Landlords are trying to navigate this new era, and they’re piling on concessions. Savills Studley:

They continue to lock in creditworthy tenants over the long-term by boosting concession packages for relocating tenants and current tenants extending their lease term. The rise in concessions is a direct response to a very sharp drop-off in leasing over the last several quarters.

As recently as mid-year 2015, tech firms were making pre-emptive strikes on space well before they had the staff to fill it. Bidding wars for space have become few and far between. Additionally, some companies are delaying space-use decisions, either due to lightened budgets or a belief that rent will be lower in the immediate future.

And the new fancy office towers and other buildings coming on the market are facing a widening gap between their $80/sf asking rents and the “growing pool of sublet space now available under $60/sf.”

This is how office markets turn. Activity plunges as demand suddenly fizzles, while new supply floods the market. Exuberance evaporates. Suddenly companies and landlords go into a standoff, and not much happens until rents come down. But once rents start coming down, companies are holding out for even more concessions and lower rents. Rather than bidding wars, tough negotiations set in, now that vacancies are rising for everyone to see. And the whole bubble mentality collapses into something resembling rational and focused business decision making.

There are already big ripples moving through the tech world. Read…  Smartwatch is Dead, Market Implodes, Apple Watch Shipments Collapse

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  38 comments for “Bubble Mentality Collapses in San Francisco Office Market

  1. michael says:

    long overdue

  2. Arbuthnot says:

    Wolf: How do we know that the signs of softness in some areas of the SF real estate market are not just reflecting a pause rather than the beginning of the end of a remarkable boom? You mention indications of peaking demand by a variety of industries – bio tech, social media etc. What you don’t mention is the very real possibility that in one form or another ZIRP is here to stay….. The reason: there is no apparent exit strategy which will not entail the risk of a depression.

    Financial markets, including long term commercial real estate leases, are generally at or near peak valuation levels and constitute the only major beneficiaries of current (desperate?) monetary policy. Meanwhile growth of the “real” economy has lagged to such an extent that signs of social and political instability are proliferating.

    Under the circumstances, more than a token increase in interest rates could have a dramatic impact. Easy money is the only support for financial markets these days. Take that away and……

    • NotSoSure says:

      When the Federal Reserve embarks on its long awaited expansion i.e. buying corporate stocks and bonds directly, office space probably will go quite quickly. But then again, all buildings will now spot the familiar: “Powered by Federal Reserve”.

      It will be an amazing world. I can see it already.

      • walter map says:

        None dare call it “corporate welfare”, but unfortunately we’re a bit short of euphemisms.

    • walter map says:

      “Easy money is the only support for financial markets these days. Take that away and……”

      The socialists will bail them out again. They’re such nice guys, those socialists. Where would capitalists be without them?

      This way the financial markets can assure themselves of risk-free returns until the bottom drops out on them, since the only people who stand to lose out are those who get no share of the gains.

      • night-train says:

        Walter Map: It does seem that capitalism requires a lot of socialism these days. Perhaps our economic system needs a re-brand. If we can’t change the system, we can at least give it an appropriate name.

    • kitten lopez says:

      “What you don’t mention is the very real possibility that in one form or another ZIRP is here to stay….. The reason: there is no apparent exit strategy which will not entail the risk of a depression.”

      yeah… this is what i was trying to ask you before, too. when they say they’re gonna stretch out raising rates over a FEW YEARS, i think, “oh my god, we don’t even HAVE A FEW MORE YEARS.”

      it’s like everyone’s gonna be homeless while there are empty houses and condos and others are stacked up in apartments like cords of wood. i just saw a report last night talking about homeless STUDENTS (PLURAL!!!!) in berkeley sleeping in cars or empty buildings to stay safe.

      (they they’ll graduate unable to find a job, with debt they can’t discharge, and can’t afford a place to live even THEN?)

      WHAT THE HELL? this is all now NORMAL here!!!! and in india they rent spaces on the street for homeless guys to sleep with used blankets??? that seems KIND next to the now-permanent parade barricades they keep spreading all over the sidewalks now. and PG&E–the electric co.–is putting 24 hour lights on the streets with loud generators to shoo away the homeless, too)

      sci fi seems CUTE next to all this.

  3. Chicken says:

    “Twitter Tax Break” – Twitter is a censored news media outlet with a purpose of filtering in real time what you’re allowed to read thus extremely valuable to the elite and will be kept going strong despite shareholders are cannibalized. After all, someone has to take the pain of supporting the elite agenda.

  4. NotSoSure says:

    In defense of Twitter. I know a couple of people working there so one day, one of them had me as a guest for lunch. The food’s so so, but their juice bar is amazing. And you can even make your own Fresh Squeezed Orange Juice. I am telling you, that technology is more amazing than a self driving car, and I am pretty sure no one is sad to see that job go.

    • walter map says:

      I’m persuaded that social media sites originated to exploit and cultivate personality disorders. They all seem to have their market niche: facebook for the stalkers, reddit for the narcissists, linkedin for the insecure professionals.

      But the real deviates and the undecideds go in for twitter:


      • bead says:

        ADHD paradise! Then again, commentary is kind of social media. Yes, I could go to the bar and discuss TV shows (if I watched TV). There is something to be said for corresponding with people with similar interests. Where I live (and it’s pretty expensive to move now) there isn’t even a bookstore. A bookseller did a market study and ran away. I can’t contribute much to a discussion of most effective semi-automatic rifles and haven’t indulged in that pleasure. Power tools don’t interest me, either. Obviously failing to watch TV marks me as anti-social. I’ll talk about cars for ten minutes at most.

      • kitten lopez says:

        “I’m persuaded that social media sites originated to exploit and cultivate personality disorders.”

        …now imagine what it’s like to live in a once-alive town taken over by the kind of anti social sociopathic psychopathic pale flaccid HUMANS who’d even THINK UP things like facebook, twitter, uber, airbnb.

        (and that it all even caught ON so huge is another reason to hyperventilate about The End of Times.)

      • Ricardo says:

        I don’t have a twitter account and I’m not interested in having one but here is what I use twitter for. I love the football game (that’s the round ball one) and as I come from New Zealand but reside in Asia I can get onto twitter on the weekend and follow the results of NZ National League matches as they happen. Then another use is being able to follow the English FA Cup right from the beginnings in August when small village teams and small clubs start off with the hopes of progressing in a very old and important (to football people) cup competition. You can also see rare pictures of English life outside the large cities.
        Twitter does have its usage but your social media Luddites and film stars you can put in a rocket and send on a one way trip to Mars as far as I’m concerned.

      • TheDona says:

        How ironic, walter map, your link is from a “leading content marketing platform.”

      • chris Hauser says:

        I KINDA LIKE WOLFSTREET. brings out the optimist in me.

        ah, never mind, it’s late.

      • Kevin says:

        Reddit for the anti-social. Instagram for narcissists.

  5. Julian the Apostate says:

    I do not understand the tech industry as a whole, but with connectivity improving at a geometric progression, why this willingness to pay outrageous lease prices in the first place? Is it because, like Detroit in the early 1900s that’s where the skilled labor pool is? But with all the importing of labor from overseas that doesn’t seem kosher…is it a status symbol to be headquartered there rather than say Wichita or Dallas/Ft. Worth or Omaha? This question should be right up your alley Wolf. What’s the big draw?

    • kitten lopez says:

      san francisco and silicon valley—it’s like hollywood here for STEM nerds. (hollywood’s not even hollywood anymore.) silicon valley has the schools/industry and talent, but is suburban and not so cool, and they use stories and mythologies–and they like the whiff of san francisco’s bad ass history– so this is how they network, shmooze, connect… plot new schemes. this is their play land. or they have multi-million dollar pied a terres here. so people from all over come here and young folks are coming here in droves, getting contract gigs if they’re lucky, airbnb hopping to stay dry, trying to get in on the ground floor of something.

      i, too, have often wondered why they don’t just take over what’s left of detroit, as it’d be infinitely more affordable and these folks never really seem to care about being outside or interacting with real life. they’d be fine sitting next to a heater with virtual reality glasses showing them a beach.

      • Wolf Richter says:

        I know some tech guys who moved to Detroit from the Bay Area years ago, bought big cheap spaces (redeveloped warehouses or something) in Downtown, which is now cool again, and never looked back.

        • kitten lopez says:

          THAT’S EXACTLY WHAT I’D DO IF I HAD THEIR MONEY!!! as an artist, Detroit has this beautiful feeling of ornate abandonment, open space, freedom, and a new wildness under the new gentrification that makes me shiver with excitement.

          all that SPACE…. brick… huge windows… gorgeous old architecture…. aaaaah….

        • Wolf Richter says:

          Am I giving you ideas? But remember, it gets cold in the winter, not warm, as it does here.


        • kitten lopez says:

          wow… imagine that…with such affordability (of detroit), and all that warehouse space, you’d have room and time to totally fuck up hugely AND brilliantly….and then even TRY AGAIN…

        • kitten lopez says:

          the more i think about your detroit guys, i think they are so smart because people used to tell me to move to LA to be in the film biz. you had to network, shmooze, be AVAILABLE at any time to meet “important people” blah blah blah… but that made NO sense to me, as i had to always move away or be away to SEDUCE and get attention.

          i couldn’t get an agent or book contract until i moved away from phila to san francisco. then all the sudden i was exotic and got attention when people would open my artsy crazy envelopes.

          and then if i stayed in san francisco and only went down to LA once in awhile, people would pay for me to fly usually, whether i was touring a book or doing a show or just for one meeting, and then i’d have all these meetings set up and people would go to the trouble to meet me.

          so your tech friends moving to detroit seems brilliant because they’re using the internet and the ability to TRAVEL to live affordably and have free time and stay enough away from the main fray, that they can always seem like fresh meat, and actually have way more attention whenever they come to town or invite others to detroit.

          yeah. i don’t get why more in tech don’t do that, and actually live the truth of such “pioneering” instead of just talking smack.

          and with the high rents here, there’s panic of fuck up on ALL levels–personal and public. i don’t see how you can come with any good idea with that kinda pressure.

          but nothing’s logical here and entrepreneurs don’t sell products for the lifespan anymore; just to get sold to a bigger company or just make it to an IPO.

          so i hope your guys are doing okay. just had to say how smart that was and to do it so early. that’s a scary move.

          my rent control is my detroit warehouse. and i’m driving James MAD with the mess. our rent just went up to $706. 400 sq feet and my Puerto Rican hair takes up 150 of that. (i won’t even MENTION what my Boricua ass takes up.)

        • Edward E says:

          Kitten, too bad you didn’t get through Branson, MO for a while. You can sing, girl, and probably dance. You probably could have been a superstar bigger than Dixie Stampede & Dolly Parton.

          Wish we could all buy this property and make it into something, like doing concerts & shows, there are some great comedians here, probably some talented performers and/or a getaway retreat for business folks who need to recharge. Brew our own Kickapoo Joy Juice and plot strategy. Multiple things could be done with this place, it’s really quite beautiful when kept up. Call it The Wolf Patch, a place to relax and get a tune up!

          Dogpatch USA Theme Park

          NE of Newton 2860 Rd and Highway 7, Marble Falls, AR 72648

          Land for Sale



          You can probably tell, Flying Monkey beer…

        • kitten lopez says:

          WOLF: ah, yes…the COLD…

          and EDWARD E! – so funny because in my own world i AM my own secret movie star now! i prefer it this way.

          this site and the fact that THIS MANY people still exist, inspires me and whatever i’m doing to start the Underground Party. and i DO dance, but in the street mostly.

          i’m going to a Day of the Dead show/party on 2 november, and am treating it like my debut for starting an art/fashion scene, as i’m gonna wear a fancy fur covered bra and match my colors and dance so hard, the ancestors will propel me forward…


          it’s not over. when my “career” died, and i then committed a living suicide, i was actually born into a bigger superfreak who no longer gives a damn about being a “good role model” for the former world. i wanna inspire heights for this NEW world.

          (how’s THAT for your optimism you were asking for, Mr CHRIS FROM DALLAS?)


          i have a feeling some of us are going to be running into each other somewhere down this line somehow. i wasn’t just talking smack when i said this place is a burgeoning new underground i’ve been despairing over not seeing. i don’t know HOW or WHY anything will take shape, how many generations of connections or whatever, but i know only there’s beautiful mad ENERGY here. reality truth ideas… but ENERGY. that’s the most important resource. more important than money any day.


        • kitten lopez says:

          and EDWARD E… i just LOOOOVE Dolly Parton. loved her ever since i was a little kid watching her when we first lived in West Virginia. all her permutations…she’s a goddess to me. she’s magic.

          wow. what a way to wake UP! thank you. have a delightful day. you inspire me to kick it up. THIS is why you call your girl your superhero. you MAKE her as she makes YOU. how fucking BEAUTIFUL is THAT???

          we’re not done…


        • Edward E says:

          Guess we should make Wolfpatch USA a little closer to Branson. But the crowds and noise, bikers with no mufflers, yet the place is growing.

          Thanks … after a huge distraction when my ol high school girlfriend showed up to try to finish me off, I am EXTREMELY LUCKY that superstar took me back after WHAT SHE WENT THROUGH…

          please excuse me, gotta get to Arkiefornia to pick up a portable boom to cut back some trees. This hard labor stuff… but the pumpkin patch called at the Menards and said I have a $880 bonus coming and they’re keeping my benefits going for when ready to go back in the saddle. They’re great, your all awesome, ttyl… gotta go

        • ExBerkeley says:

          I did exactly this, but a warehouse in Eastern Washington state instead of Detroit.

          I miss the Indian food and Doe Library, but that’s about it. The laboratory and facilities I have out here would’ve taken me decades of schmoozing to assemble on campus.

    • Lisa says:

      I think it is a matter of this (the Bay Area) is where the money is because it is where the tech venture capitalists are. Connectivity or not, you have to sell your idea to a person, and that person is most likely here in the Bay Area. Once your company starts growing enough to need a lot of space, you put support and other employees elsewhere, which companies are already doing (Phoenix is a popular spot or even with Uber as Wolf wrote), but you generally need some people, at the very least, here. And having people scattered can present its own challenges.

    • NotSoSure says:

      Why is the bagel in New York “better”? They said it’s the water. Same with SF really. Only the water i.e. kool aid didn’t help me yesterday when I went to interview for a new job at a company.

      I passed the tech portion with flying colors only to flub it when I “dared” to ask a senior manager about profitability.

      I know people worry about AI taking over jobs, but there’s seriously a bubble in the so called “data driven” mentality. Everyone I spoke to at the company spoke about doing everything in the “data driven” way without realizing:
      1. The data shows that very few startups become successful.
      2. The data shows that the economy is artificially propped up with monetary sweeteners.
      3. The data shows that lots of things in life are unpleasant.

      But yeah, it’s the “water”, you have to try it!!!

    • TheDona says:

      It started with the Military, Stanford, and the original high tech labs. This morphed into the Semiconductor manufacturing hub…hence the name Silicon Valley because to the chips are made on Silicon wafers. There is not much Semiconductor manufacturing out there now. Huge base of talent out there….always has been.

      • Beard681 says:

        Yes – the military was their because of the weather. More days to fly back when “nothing can stop the Army Air Core – except the weather.”
        The talent followed the jobs – always does.

  6. Lisa says:

    What is the difference between Financial District South and SOMA, boundaries wise?

    • Wolf Richter says:

      This is a Google map of SOMA (South of Market) – the diagonal line is Market St. It also includes Mission Bay and South Beach. I added to it the rough outline in red of the Financial District.


  7. Julian the Apostate says:

    Glad to see I’m still fulfilling my role as catalyst…it’s my purpose and why I came back after 2000 years. I don’t remember why but I know it’s important and the perks are wonderful. Watching you bloom into a full blown expression of who you are Kitten was gratifying. All I can say is “you go girl” you’ve got this trucker’s vote☺️ And thanks to all of you on the Silicon Valley tutorial!

    • kitten lopez says:

      “Watching you bloom into a full blown expression of who you are Kitten was gratifying.”

      BESOS, JULIAN THE APOSTATE! what sweetness to wake up to!…but as for your “was” past tense, i’m hardly done as i’m just BEGINNING.

      good morning!


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