Last time it tried to sell the building was in 2019. Now the office market is an entirely different ballgame.
By Wolf Richter for WOLF STREET.
The office market in San Francisco – the epicenter of working from home and of corporate headquarters move-outs – has been in a sour situation since before Covid, and it has gotten a lot worse. At the end of Q2, nearly 28% of the total office space was on the market available for lease. Only a little less terrible than the office markets in Dallas/Fort Worth and Houston.
But since the end of Q2, lots of new office space has been dumped on the sublease market. Salesforce put 412,000 square feet in Salesforce West tower on the market in July, representing about half of its headquarters space there. Twitter told employees in July it would shutter an entire building. Just about every day, more tech companies are trying to cut their footprint in San Francisco.
Now Craigslist is at it. And the pricing situation is interesting.
Craigslist has put a nine-story 135,200 square-foot office building at 222 Sutter Street on the market, for a second time, according to The Registry. The building, located in the North Financial District, also has some retail space. So good luck with that in this neighborhood. This time around, its asking price is $60 million.
Craigslist is not in this building. Its headquarters is on Market Street. For Craigslist, this building is an investment property. It leases the building out to other tenants. But the building is only 22% occupied.
Craigslist bought the building in 2012 for $53.8 million. The new asking price is just 11.5% above where the sales price had been 10 years ago. Even a minor further price reduction, after fees and closing costs, could wipe out any gains altogether.
Craigslist tried to sell the building in late 2019. The office market in San Francisco had peaked in early 2019, and by Q4 2019, the overall availability rate had started to rise from the below-8% range in early 2019 to nearly 10%. At the time, Craigslist’s asking price was $100 million. At that time the building was 68% occupied. When Craigslist couldn’t sell the building, it took it off the market.
It’s an entirely different ballgame – hence the 40% price cut.
The first time the building was listed, the availability rate in the San Francisco office market was less than 10%; now it’s 28% and getting worse just about every quarter.
In 2019, the building was 68% leased; now it’s 22% leased.
Asking rents for Class A office space – which this building is considered to be – have fallen by about 15% since late 2019, according to Savills.
Despite the drop, at around $75 per square foot per year for Class A buildings in San Francisco, office rents remain hugely expensive and are still a massive disincentive to rent office space in San Francisco – especially when working from home is a functional alternative for many companies.
The vacancy rate, and the future expected vacancy rates, once the leases terminate across the City and even more space comes on the market, are so somber, there are discussions now, including with city officials, on how to convert some of this vacant office space to housing, because what else are we going to do with it?
Investors in office buildings have to wonder: How low do we have to go with rents to attract tenants in this environment? And they have to wonder: at what price do we have a reasonable chance of making money with this building, given this situation?
Obviously, being 22% occupied now, the building’s rents haven’t gone nearly low enough to fill up the building.
A lot of tech companies have put a lot of sublease space on the market that they just want to get some money for during the remaining years of the lease, and they’re pricing those office spaces more aggressively even as there aren’t a lot of tenants looking for office space. This will be the competition.
At this point, it’s really tough trying to figure out what the clearing price might be, with the market as messed up as it is – still horribly over-priced, and still horribly vacant. And that 40% cut in asking price nearly back to the purchase price a decade ago – as huge as it is – is just another effort to stimulate interest and find the clearing price in this environment.
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