How to sign an office tenant in SF’s highest-vacancy neighborhood

Kai Ming Head Start has signed a 10-year lease on nearly 11,000 square feet in Yerba Buena at less than half the pre-COVID rate, one of only two deals over 10,000 square feet in San Francisco’s highest vacancy neighborhood so far this year. 

The lease, first reported in Traded, is a valuable indication of market rates for a renovated multistory building in the greater SOMA area, according to Joe Harney of Reliance Real Estate Advisors, who represented the owner.

“Many asking rates on commercial properties are not indicative of where transactions are consummated, much of which can be attributed to landlords being handcuffed due to the amount of debt/debt payments on the property,” he said via email.

The owner of this property, who Harney called a “seasoned San Francisco investor,” did not have a lot of debt and was “therefore able to agree to flexible terms,” he said.

Before the pandemic, the three-story 1924 building at 934 Howard Street was leasing at $5 per square foot, industrial gross, or about $660,000 annually for the 11,000-square-foot space, Harney said. When he began marketing the property in March 2022, the asking rent was $3 psf IG.

“We had the option to either chase the market down or price the building where the market was headed,” Harney said. 

After a year of working with the early childhood education nonprofit, the lease was signed June 1 at $2.33 psf IG or just over $300,000 annually. Over the past year, nonprofits were the main group that looked at the building, along with a few architecture firms, Harney said. 

Kai Ming, which was represented by Marc Trovato of Kidder Mathews, already had its main office across the street. It is under renovation and will become another free early education center, the nonprofit’s 10th in the city. The new offices, which will not be used for child care, were remodeled extensively in 2018 and did not require any tenant improvements. 

It was “a natural fit for their expansion of their community services,” Harney said. 

The 11,000-square-foot deal is the second-biggest lease signed in the small neighborhood between the South Financial District and Mid-Market so far this year, according to George Entis, senior research manager at Transwestern. A deal for more than 12,000 square feet at 731 Market Street marketed by JLL was also signed in June, said Entis, though he did not know the tenant.

These two deals come after a first quarter where Transwestern data shows less than 6,000 square feet total leasing activity in Yerba Buena. The neighborhood is nearly 50 percent vacant, by far the highest rate in a city where one in three offices are empty. Transwestern data thus far in the second quarter shows vacancy rising 190 basis points from the first quarter, the largest quarterly increase since the first quarter of 2021, Entis said. 

Brookfield’s 5M project, which is next door to 934 Howard, has added a lot of inventory but not many tenants to the neighborhood, thus ratcheting up the vacancy rate. The investment firm has filled only 20,000 square feet, or 3 percent, of its 640,000-square-foot tower at 415 Natoma Street since opening in late 2021. Last month Brookfield partner Hearst said it would pause the next phase of the 5M development, putting off plans to build 400 condos at the 4-acre site. 

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