San Francisco office owners bet on spec suites

Spec suite build-outs up 50% in attempt to “wow” workers back to the office, agents say

(Getty images)
(Getty images)

San Francisco employers are taking a seductive approach to the return to the office, betting on top-tier spaces in key downtown locations to lure their workers back. 

Availabilities abound across much of San Francisco’s central business district, but vacancy is below 10 percent for high-end Class A offices as employers have the luxury of refusing to settle for anything less than stand-out spaces. 

“We are probably seeing the widest spread on record between top-tier pricing and commodity,” said Colliers research director Derek Daniels.

Annual asking rents for “prime” properties — those close to transit and offering views, amenities and updated interiors — averaged $99.46 per square foot in the first half of the year, higher than the $99.25 recorded in 2019, according to CBRE. 

Non-prime Class A space, meanwhile, was going for $79.43 a square foot, down about 14 percent from the first half of 2019. Those rates drop to about $70 and $60 a square foot for Class B and C space, respectively. 

Landlords have two choices, according to Avison Young’s Mark McGranahan: Get proactive by building out spec suites with the polished concrete floors, high-end kitchens and “huddle rooms” employers want to wow their workers, or sit back and “wait for that Cinderella foot to fit that slipper.” 

“The problem is, there’s not that many Cinderellas and there’s a lot of slippers,” he added.

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The traditional model of negotiating a tenant improvement budget has become less desirable as construction costs and timelines rise. Prospective tenants will happily hand those headaches over to the owner, even if it means the final product is not as personalized.

“If a tenant is large enough and they want to have their core culture and standards they’ll build to that, but that’s not the norm these days,” said Avison Young construction manager David Gonzales. “The norm is, what’s out there? What can we take?”

For most tenants, time is of the essence and landlords will be rewarded for spending up front, even at the going rate of about $150 a square foot to build out spec suites, McGranahan said. 

“If people return to work, they want to return today,” he said. “They don’t want to return in nine months.”

Colliers’ John Jensen said some tenant brokers have been asking for $200 per square foot in improvements, a “mind-blowing” number compared to the pre-pandemic norm of about $60 per square foot. 

He’s been advising his clients to not just renovate their spaces but also stage them like a residential broker would, with options to keep rented furniture and decor. More than half of tenants end up keeping everything, he said, with startups the most likely to want a plug-and-play solution.

“A lot of the venture-capital-backed groups are in more of an immediate need,” he said. “Their investors want them to get going right away. They can’t wait.”