Starboard Commercial Real Estate

Hans Hansson | September 21, 2012

This week, the San Francisco Business Times ran an article stating that San Francisco office space subleases have increased by 35 percent over last year – this article was run at the same time that VISA indicated that they were closing their San Francisco offices. Still, the office vacancy rate in San Francisco continues to decrease while rates are still swelling as a result of the continued growth of Technology firms in our city.

I recently attended an international real estate conference where across the country and around the board I heard the same thing: demand is still soft and rents are stagnant at best. Despite all this, San Francisco, along with Washington DC, remains one of the few markets that has seen two years of continued growth, lowering office vacancy rates and raising rental rates. On the surface this appears to be good news, but the underlying problem is that our traditional businesses are struggling like the rest of the country and not seeing the same upsides as our technology industry.

San Francisco has seen rental rates soar as much as 40 percent over the last two years but traditional businesses have seen modest net income growth at best. In order to remain profitable, businesses need to pay no more than 6-8 percent of their gross income on rent. A 40 percent increase in rent in these economic times could prove to be devastating to our core, traditional businesses.

While the impact of these increases will be gradual since not all leases are expiring at the same time, the growth of subleases is a bad sign. Businesses that have leases coming up in the next couple of years are recognizing how expensive San Francisco rents will soon be and may decide to pack up and leave to find cheaper office space in other markets.
Posted 6 years, 10 months ago on September 21, 2012
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