Sublets signal dip in San Francisco real estate prices
San Francisco's commercial real estate market may be foretelling a slowdown in the city's heated technology-driven economy.
Office subleasing, an early indicator of past downturns, is at the highest level since 2010. The amount of available space from subleases in the city is up 46pc in six months. Twitter is among firms putting excess space on the market.
"It's the beginning of the change," said Kenneth Rosen at the Haas School of Business at the University of California, Berkeley. "We're very early in the correction process. It's going to take several years to play out, and we don't know how deep it will be."
A five-year frenzy for San Francisco office space may be cooling as venture-capital investments decline and tech firms slow their hiring from a breakneck pace. The extra space is a warning sign that the growth rate for some companies was unsustainable, Rosen said. Some startups took more space than they needed in the hopes of expanding later, while others are moving to less-expensive areas or shifting staff to other buildings in the city.
A pullback would be a marked shift for one of the hottest US real estate markets. San Francisco had the lowest metropolitan office-vacancy rate at the end of last year, at 5.9pc, according to CBRE.
An increase in subleasing preceded office-market downturns following the 2008 financial crisis and the dot-com bust in the late 1990s, said Colin Yasukochi, director of research at CBRE in San Francisco.
The trend isn't entirely negative. Some companies that leased space in the early stages of the boom can rent it out at a profit. Others may be expanding and moving into bigger offices, an indicator of growth.
Subleasing also opens up more affordable space at a time rents are near record highs. The space on the market for sublease have asking rents about 17pc below those of regular leases, according to Cushman & Wakefield.
More than 1 million square feet in additional sublease space will likely be available this year, said Hart of Savills Studley. He said he's more concerned about a shift in tenant demand.
Anaemic initial public offerings and falling valuations for some tech companies are leading to a decline in the early-stage investments that help fuel office demand. Venture-capital investments fell 32pc in the fourth quarter from the previous three months to $11.3 billion, according to a January report from PricewaterhouseCoopers. Bay Area companies releasing IPOs dropped to 26 in 2015 from 35 the year before, Savills Studley data show.
"We're going to have a correction in the job market in San Francisco over the next several years," said Berkeley's Rosen. "We had an economy that was growing based on the availability of capital rather than the fundamental performance of some of the companies." (Bloomberg)