Monday 24 October 2016

Sub-leases in favour as office prices surge

Emily Chang

Published 28/05/2015 | 02:30

Companies in San Franciso are sub-letting their space as rental prices keep rising
Companies in San Franciso are sub-letting their space as rental prices keep rising

Square 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.

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

San Francisco, where the technology industry has dominated office demand and sent rents soaring, leads the US in sublease space as apcage of total vacancies, according to Cushman & Wakefield.

The share jumped to 13.5pc in the first quarter, the highest since the financial crisis, from 9pc a year ago. While the city's commercial real estate market is among the 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 sq ft at the Market Street building, which it leased almost three years ago.

Lookout, a mobile-security company, has put 10,000 sq ft 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.

A spokeswoman for Lookout, declined to comment.

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.

"There's a bubble," Mr Kelman said told 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, Mr Kelman said.

Total sublease space on the market in San Francisco stands at 1.4 million sq ft, with 956,000 sq ft of that located in the north and south financial districts, according to Savills Studley. That number is poised to grow because Charles Schwab is planning to sublease out 300,000 sq ft 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., Crunchyroll, Zillow and Sega of America are also offering space for sublease, according to Savills Studley. Zynga last year leased part of the building it owns to Practice Fusion, an electronic medical-records company.

A Zynga, and a Zillow spokeswoman, declined to comment.

San Francisco space offered for sublease is still far from the peak of 2.2 million sq ft 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 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." (Bloomberg)

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