San Francisco Commercial Real Estate News: Does SF tech firms shedding office space indicate a bubble?

Source: San Francisco Business Journal
Reporter: Cory Weinberg
Date Posted: April 23, 2015

About 50,000 square feet of space in at 1455 Market St. just hit the market – a big block leased by the public advertising tech company Rocket Fuel. The brokerage Savills Studley said in a report that Rocket Fuel (NASDAQ:FUEL) is the kind of company subleasing space after “not expanding as quickly as anticipated or shedding a bit of payroll.” After the company’s revenue growth faltered, it said it wouldn’t hire as aggressively.

SF Skyline_for web

Rocket Fuel isn’t alone in shopping around its offices. The sublease market in San Francisco has suddenly ticked up, and sublease space now makes up the largest percentage of vacant space since the depths of the recession, according to new data by the brokerage Cushman & Wakefield. San Francisco and Silicon Valley lead the nation in sublease space as a percentage of vacancies – about 13 percent for each.

It’s a leading indicator important enough to raise eyebrows if it means that companies got too ambitious with their real estate needs and are shedding space – puncturing a hole in a potential office market bubble.

But market watchers aren’t jumping to that conclusion yet.

Developers and brokers aren’t panicking because the raw amount of sublease space on the market in San Francisco – nearly 650,000 square feet – doesn’t come close to the 2 million square feet of subleased space on the market during the recession or the 6 million square feet during the dot-com bust. The amount of total vacant space is also at a 15-year low, according to Cushman & Wakefield.

Sublease space increased a bit last quarter in part because “tenants (particularly tech-related tenants) are leasing or pre-leasing ahead of hiring to lock in today’s rents before further increases,” Cushman & Wakefield’s research director Robert Sammons wrote.

Sammons said San Francisco and Silicon Valley’s high proportion of subleased space has some likely company: New York City’s Midtown South submarket, which is also heavy on technology companies, has the same sublease rate.

“Not every tech firm is going to be the next Google, so there will be an ebb and flow where they expanded more than they should have,” he added in a phone call. “The flip side of that is that there are a lot of tenants looking for built, plug-and-play space because they don’t know what the next year is going to bring them.”

Plus, he added, San Francisco is still posting some of the best employment numbers in the country and office development hasn’t slowed – two other indicators to watch.

A boost in sublease space can help companies feeling the squeeze from the city’s 8.1 vacancy rate, one of the lowest in the nation. The companies shedding the space get to cash in, too.

The digital real estate marketplace Trulia (NASDAQ:TRLA), for example, just put two floors – 26,600 square feet – up for sublease in the new, gleaming 535 Mission St. tower. A spokesman said the company is “investigating opportunities in the normal course of business” and taking advantage of San Francisco’s “hot commercial real estate market.” The company was also just acquired by Zillow, which also put about 20,000 square feet of its 222 Bush St. on the sublease market.

Even Salesforce (NASDAQ:CRM) is subleasing about 144,000 square feet in One California St. and 70,000 square feet in 123 Mission St. as it moves into its eventual urban campus next to the Transbay Transit Center.

Other available sublease spaces include Microsoft’s 30,000 square feet at 835 Market St., Conversant’s 32,000 square feet at 160 Spear St. and IZ-ON’s 40,000 square feet at 600 Harrison St.

In San Carlos and Redwood City, new sublease openings by SoftBank and DreamWorks add up to about to 400,000 square feet
“In most cases, sublet space has been added by companies that are banking space for future use and want to monetize in the meantime,” according to Savills Studley’s latest market report. “The sublet space provides scant relief to a space-parched market.”

Link to article: Office Space Bubble