San Francisco’s commercial real estate vacancy hits 24% as companies such as Splunk downsize

Data analytics company Splunk is not moving its headquarters, but it is downsizing its office space in downtown San Francisco. The move is part of a larger trend as commercial real estate vacancies have increased and become a big challenge for the city as companies adjust to more work-from-home hybrid models.

SAN FRANCISCO – It was 2016, when Splunk moved its San Francisco headquarters into the shiny, new South of Market building at 270 Brannan Street. Now, the data analytics company has decided to downsize, giving up its lease at the 215,000-square-foot space.

“San Francisco remains Splunk’s headquarters. We are consolidating our operations to a newly renovated office space at 250 Brannan, where Splunk began,” said a Splunk spokeswoman in a statement to KTVU.

That building at 250 Brannan where Splunk first started operations is less than half the size of the current headquarters space next door.

“We’re close to 24% vacancy for office space in the city,” said Matt Regan, Vice-President of the Bay Area Council. Regan says that is a new high for San Francisco, “We didn’t see numbers that high after the financial collapse or after the dot-com bust, so these are pretty unchartered, unprecedented times.”

Throughout downtown San Francisco, the impact of work-from-home pandemic policies is evident in the number of for lease and rent signs in the windows.

“Things are not at 100% capacity. We’re on a hybrid schedule and things are definitely not what they were pre-pandemic,” said Sridhar Akkapeddi, a San Francisco resident who works downtown, “I think that this notion of needing to be in a certain place to do certain types of work is going to change.”

“My office started three days a week as a requirement to get in the office and be there,” said Shivali Naik of San Francisco, “I’d say not every company has opened up yet, but things are opening up slowly.”

Along with commercial office space, there are also vacancies where retailers and small businesses that depended on foot traffic from office workers have felt the pain.

The Sutter Station Tavern one of the businesses that has survived, a fixture on Market Street for 25 years. Happy hour crowds, though, are far lower than pre-pandemic levels.

“Right now it’s like 30%,” said the owner Barbara Alessi. She says she’s happy to see people returning and hopes for more, “I’m hoping the businesses come back. I think the real estate in SF is so high and hopefully goes a little lower, there’s so much vacancy right now.”

The Bay Area Council says office rents have come down recently from pre-pandemic levels of about $90 per square foot.

“It’s now down to about $76 a foot, which is still relatively high both historically and compared to peer markets,” said Regan.

“There’s definitely still some optimism in the commercial real estate world that things will return to normal, so there aren’t as many bargains out there to be had as one would expect given the size of the vacancy rate,” said Regan.

“Abandoning downtown areas is not a trend that we are seeing, it’s more of a pause as companies assess their needs. Most companies strongly believe in the role office workplaces provide for collaboration, innovation and company culture,” said Colin Yasukochi, Executive Director of the real estate firm CBRE’s Tech Insights.

“San Francisco still has a long way to go to fill its 20 million sq. ft. of currently vacant office space. CBRE estimates that at least 100,000 new workers are needed to accomplish this,” said Yasukochi.

The Bay Area Council says while some jobs might remain remote, there are signs from the organization’s surveys that tech workers who tend to be younger might be inclined to return to offices in the future.

“Younger workers do tend to want to come back to the office as well, because mentorship opportunities are not really possible when you’re working remotely. The camaraderie, the social aspect of working in an office with teammates and colleagues is something younger workers seem to miss a lot more,” said Regan.

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Steven MacDonald has felt more like unloading fax machines or Friendster merchandise than prime office space in San Francisco for about six months.

MacDonald has been in real estate law for 30 years, most of the time having had offices in the Flood Building, which used to be a prime location. It’s just a few blocks from Union Square and the financial district, and right next to a Bay Area Rapid Transit subway station.

He had two small offices in the sublet market since August when it became clear that his company would join the post-pandemic hybrid revolution – some days in the office, some at home.

The problem is, every other lawyer, therapist, or insurance agent in San Francisco seems to have the same idea.

“I’m not getting anything,” said MacDonald, 72. “And I was just talking to my administrator and she just told me they dropped the ad.” There were no nibbles. “

About 18% of San Francisco’s office space is currently in the market, about 14 million square feet of empty space. Large companies synonymous with the city, from Twitter and Salesforce to Levi’s and The Gap, have announced plans to downsize as they envision a future where remote work prevails.

“It has been an undoubtedly difficult 12 months,” said Robert Sammons, senior director, Bay Area Research, Cushman & Wakefield, a commercial real estate company.

While demand for lower-priced property has declined significantly, other parts of the market are showing some signs of life.

The Salesforce Tower, the tallest building in the city and a shining monument to how much property Big Tech has devoured in San Francisco over the past decade, remains in great demand.

“If you’re a world class renter and you want to be the best product in San Francisco, you should turn to Salesforce Tower,” said Sammons.

The appetite for so-called “trophy” buildings is holding up quite well. Nothing says “our SPAC killed its IPO” like a panorama of San Francisco Bay on the 61st floor.

It is the smaller buildings with no gondola traffic that are the bigger concern.

This could be an opportunity for the next Salesforce, which right now could just be two programmers working in their proverbial garage … or zooming out of two different garages.

“There are smaller technology companies, there are smaller professional service companies. Now is kind of the sweet spot for a lot of them, “said Sammons.

So far, however, startups have done more window shopping than actual leasing. Another industry is far more aggressive when it comes to creating space. They’re still tech, just no hoodies and jeans tech.

“If you walked through the lab, you’d see a typical diagnostic lab, and yes, there are lab coats,” said Ken Knight, chief operating officer at Invitae, a biotech company that does genetic testing.

Invitae signed a contract for a second location in San Francisco earlier this year. The terms of the contract are not public.

“We wouldn’t have signed the lease if we weren’t comfortable with the opportunity,” said Knight. “So yeah, we feel good about the deal.”

Biotech companies like Invitae can’t be completely removed, and that has been a real estate lifeline in San Francisco. Three months ago, pharmaceutical company Vir Biotechnologies took over a huge portion of Dropbox’s headquarters. Not long after that, the property sold for over $ 1 billion, a record price per square foot for office space in San Francisco.

Not every commercial property in San Francisco can accommodate what biotechnology often needs: laboratory space, floors that can carry heavy machinery, state-of-the-art ventilation systems.

However, news of the deal was still a positive sign for Carmen Chu, the city manager of San Francisco. Not only did this mean more property taxes, the city’s largest source of income, but it also sent a strong signal that investors don’t believe the city will dwarf itself.

“We have about 900,000 residents, but on weekdays we swell to over a million people who come to work,” Chu said. “All of these people, they shop in our centers, they eat in our local cafes.”

And they pay sales tax, another important source of income.

Chu can count on Steven MacDonald to bring in his fair share of the city coffers – he’s not going anywhere. Nibbles or no nibbles, he made this place his own.

Just before the pandemic, MacDonald was putting the finishing touches to the lounge of his 18th century office. Leather sofas, a tapestry from the Habsburg Empire on one wall, an oil painting of a French aristocrat on the other.

“This is a room that I’ve pimped up to use slang,” MacDonald said.

MacDonald knows that other law firms in San Francisco are completely remote. But he believes he will have a competitive advantage if he stays on the pitch. The lounge is a good place to have a drink with your opponents.

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