San Francisco’s office leasing boom shows no signs of slowing down, and its effect on the greater region — especially Silicon Valley — is accelerating.
The Bay Area has always sustained on a geographic symbiosis, though experts say this latest boom is peculiar because of its inversion. In previous up cycles, the anchor companies often started in Silicon Valley — think Google, Meta, Apple — and eventually expanded north to capture the young, urbanite talent of the big city. In the artificial intelligence era, San Francisco plays well spring for the billion- and trillion-dollar companies, which are increasingly headed toward the pools of spacious offices and campuses in Silicon Valley. Soon, experts say, it could even quench Oakland’s commercial investment drought.
Some of the most notable leases of the past six months came from San Francisco companies seeking Santa Clara County digs. In February, chatbot behemoth OpenAI signed a 450,000 square-foot lease in Mountain View. In recent months, Sunnyvale has lured companies from Apple to Pinterest, and AI software firm Databricks has been rapidly assembling a 635,000 square-foot campus there. The city cut its vacancy rate from 15.2 percent to 9.8 year-over-year, according to Colliers.
Artificial intelligence’s southward expansion has helped Silicon Valley’s vacancy fall to 14.1 percent, making it the belle of the Bay Area ball, per Colliers. At this time last year, Silicon Valley’s vacancy rate held around 16 percent.
The momentum has inspired some major tenants to double down on the region. Cybersecurity firm Palo Alto Networks renewed its 941,000 square-foot lease at the Campus at Scott complex in Santa Clara, and semiconductor company Advanced Micro Devices renewed its 314,000 square-foot office on Augustine Drive in Santa Clara Square.
Companies are also rethinking their sublease strategy. In the heat of the work-from-home era, Google had put nearly 2 million square feet of its Silicon Valley office space on the market for sublease. Then, earlier this year, the tech titan pulled it back. Sources told the San Francisco Business Times that competition could have motivated the move, as rival OpenAI was said to be touring some of the space for its own Silicon Valley expansion. The company could also be calling workers back to the office, or may need more space for AI research and development.
Google’s reclamation of its space fits a larger trend in Silicon Valley. Only 1.3 million square feet of subleasable office was available at the end of the quarter, the lowest mark since 2016.
“That speaks to the strength of the market,” said Mike Pham, a research analyst at Colliers who focuses on Silicon Valley. A sublease, he said, often indicates “a screaming deal,” on office space. However, as office space becomes more valuable throughout the Bay Area, landlords would rather terminate a lease and test the market than watch their space go for an unnecessary discount.
Time to build?
In San Francisco, the flight to quality has sent rents for premium spaces to $140 per square foot, a 40 percent increase year-over-year, according to JLL.
This kind of trophy space typically involves vistas of the San Francisco Bay, with at least one of its famous bridges in-view. Today, only about 5 percent of this space in San Francisco is vacant, roughly 52,000 square feet, according to Chris Pham, senior research analyst with JLL.
The citywide vacancy rate still sits somewhere between 28 and 32 percent, with average asking rent sitting at $66 per square foot — less than half of the cost for a typical trophy space. This spread in rents and vacancy rates between the top and middle of San Francisco’s inventory is unique, Pham said, and still widening.
Yet, contrary to the logic of those vacancy numbers, the city could soon see new trophy office towers break ground. A few have been entitled and are a tenant agreement away from construction, such as Related California’s 41-story hotel/office tower, on the fringes of Jackson Square. A shiny new commercial tower might seem counterintuitive in a market where one-third of the office stock sits empty, but the artificial intelligence boom continues to cultivate new, billion-dollar companies that not only want the best space, but want to stay in San Francisco.
“I think we might see a pre-lease and ground breaking later this year, which would be pretty unheard of considering how much vacancy is in the market,” said Derek Daniels, regional research director at Colliers.
Pham at JLL is less enthusiastic, and predicts a groundbreaking by the end of 2027. He’s more intrigued by the inverse nature of San Francisco’s latest recovery. Historically, the resurgence began downtown and in the Financial District and trickled outward. This time, residential-adjacent neighborhoods, such as the Dogpatch, Potrero Hill and Showplace Square, are seeing greater demand, particularly as the AI industry moves from behind the computer screen and into the physical world through robots and gadgets, requiring larger blocks for research and development.
Class B vacancy in the second quarter fell from 33.4 to 30 percent year-over-year, while Class C fell from 20.3 to 15.8 percent, according to Colliers.
Downtown San Mateo has even seen the return of speculative development. Mecah Ventures is underway on its 40,000 square-foot project Parallel on Claremont, and the Martin Group’s 30,000 square-foot mixed-use office project, Arbello, has also broken ground.
The East Bay sees some light
Anchored by Oakland, the East Bay has taken on the role of middle child in the region’s office recovery.
Downtown Oakland has struggled mightily, with total vacancy edging up from 30.3 to 32.3 percent year-over-year. The highest asking average asking rent among the major East Bay submarkets was $4.28 in the Oakland-adjacent Emeryville.
However, the East Bay is due for a shift, said Jacob Meyers, a senior research analyst with JLL. In a recent report tracking recovery timelines of the Great Financial Crisis of 2008 — the closest economic comp to the pandemic pillage — Meyers found that vacancy peaked in San Francisco 15 months before it peaked in the East Bay, and that full recovery lagged 21 months.
“We expect this to follow a similar timeline,” Meyers said
A shift is already underway. The Oakland submarket outside of downtown — Alameda, Oakland, Emeryville, Richmond and Berkeley — saw a handful of large-block leases this quarter. Premier Nutrition took 119,000 square feet in Emeryville, MATS Research took 34,000 square feet in Berkeley, and Marina Village drew new leases from pet food company Hormel and Perforce Software. The market saw an overall positive net absorption of 117,000 square feet.
“We haven’t seen this kind of activity since pre-pandemic times,” Meyers said.