San Francisco Commercial Real Estate News: Office Bubble?

Charles Schwab, Square latest companies to unload S.F. office space
Source: San Francisco Business Times
Reporter: Cory Weinberg
Date Posted: May 26, 2016

The amount of office space available for sublease in San Francisco is about to reach a five-year high now that mobile payments company Square and Charles Schwab are expected to lighten their footprints.


A Charles Schwab (NYSE: SCHW) spokesman told the Business Times that it is looking to sublease its 327,000 square feet at 215 Fremont St. so it can eventually consolidate into one building at 211 Main St.

Square just put 50,000 square feet on the market from its 1455 Market St. space, Bloomberg reported. That would reduce Square’s leased space there by one-fifth and comes soon after neighboring tenant Rocket Fuel Inc. also put a big block of space on the market after revenue and hiring slowed.

As more companies ditch their office spaces, it raises alarms for a potential commercial real estate downturn, as I detailed last month. Those alarms may blare more loudly now that these potential listings put sublease space at about 1.7 million square feet, San Francisco’s highest total since the tail end of the recession in the last quarter of 2009.

With both real estate developers and tech companies relying on cheap capital, rising interest rates could dent those markets, Glenn Kelman, CEO of brokerage Redfin Corp. said on Bloomberg Television last week.

“There’s a bubble,” Kelman said. “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.”

But these two cases also highlight a paradox on the city’s real estate market – traditional companies that are fleeing the city to lower costs and technology companies looking to lap up as much space as they can afford in a tight real estate market.

Square is one of several tech companies (like Trulia, Zillow and Salesforce) that have looked to gobble up space way ahead of what they actually need in order to anticipate future growth in a space-constrained market. That’s also why the office vacancy rate is at a 15-year low, according to Cushman & Wakefield.

It’s also why 80 percent of the 4.1 million square feet of office space under construction in the Bay Area is pre-leased, as DTZ research director Garrick Brown detailed in a March blog post. He said there’s little reason to worry, even if the economy takes a dive in a couple years.

“So if current leasing trends persist, it is highly likely that none of this space will be delivered without a tenant connected to it. None! So is there about to be an oversupply of office space in San Francisco? It sure doesn’t look that way to me,” Brown wrote.

This is Charles Schwab’s second round of San Francisco consolidation in recent years, after it subleased its old headquarters at One Montgomery in 2009 to cut expenses. Last year, it announced intentions to move hundreds of jobs out of San Francisco to lower-cost places like Colorado and Texas.

“As the number of San Francisco employees has gradually declined, it has made it possible this year to consolidate some of our office space in the 215 Fremont building. Hence there is space available there for leasing,” Charles Schwab spokesman Greg Gable told the Business Times last week.

Real estate brokers said they haven’t seen the South Financial District space officially hit the market yet, so it’s unclear how it will be priced. Charles Schwab signed a deal there in 2001, renting at an ultra-low rate of $21 a square foot through 2024, according to CoStar.

Link to article: Office Bubble