Autodesk has renewed its lease for nearly 93,000 square feet in San Francisco’s One Market Street complex, the biggest office deal in a second quarter when vacancy rates continued to hit new highs, according to several quarterly commercial reports.
The construction and design software company put 73,000 square feet of space up for sublease at the beginning of the year and has no current plans to renew on those two floors of its headquarters when the leases expire, according to an Autodesk rep. The company said it is not planning any further downsizing at this time and plans to renew the rest of its remaining 211,000 square feet of space as those leases conclude. It would not comment on the terms or length of the recently renewed lease.
Since the pandemic, the company has developed a “hybrid-first company culture” called Flex Forward, according to the representative, which has led it to reassess “how we use physical office space to support the evolving needs of our team and business.”
“Under Flex Forward, our remaining physical office space has been redesigned to provide a greater variety of flexible options that support all activities and workstyles — from quiet focus areas to inspiring collaboration zones to fun social spaces,” the company said in a statement.
The deal was the biggest in the second quarter, with Stifel Financial’s renewal of 70,000 square feet at One Montgomery in second, followed by a sublease from legal firm Wilkie Farr & Gallagher at 333 Bush taking 44,000 square feet off the market in third, according to CBRE. The biggest new direct lease of the quarter was FrontApp at 300 Montgomery. The workplace email communication platform is headquartered in San Francisco and took on a little more than 18,000 square feet.
Vacancy rising
The overall vacancy rate went up again and now sits at a record high of 31.6 percent, or 37 million square feet of unoccupied space, according to CBRE data. The brokerage reports a negative absorption of 1.83 million square feet in the second quarter, while Transwestern put the number even higher at 2.2 million square feet. That’s the largest jump in two years, according to Transwestern’s second quarter report. Sublease space is also up to a new high at 11.5 percent of the total inventory, compared with 9.1 percent a year ago and less than 3 percent before the pandemic.
Overall, direct rental rates were down 4.3 percent from the first quarter, with Class B rents taking a bigger drop than Class A, according to Transwestern, reflecting the continued flight to quality.
“Companies are being strategic about securing high-quality spaces that will encourage a return to the office as occupancy levels remain stagnant,” according to the report, which cited Kastle card entry data showing 45.4 percent of workers swiped in during the week of June 21, a number that has remained fairly consistent all year.
CBRE put the average asking rent at $73.59 per square foot per year citywide, or $6.13 a month, a 2.1 percent decrease quarter over quarter, though that could differ dramatically by neighborhood. Mission Bay/China Basin continued to be the most-expensive submarket with an average rent of over $86 per square foot while West SoMa was the lowest at just under $54.
Tenant demand was up to 4.5 million square feet, according to CBRE, a 36 percent increase over the previous quarter and a 61 percent increase over the end of 2022.
“Leasing activity will likely remain slow for the remainder of 2023, but the steady increase in tenant demand over the past six months indicates there will be a leasing uptick in 2024,” according to the report. “As the market-wide vacancy rate gets closer to its eventual peak, well-capitalized landlords with a lower cost basis will be better positioned to attract and retain tenants through competitive pricing and favorable T.I. packages.”
AI wants space
VC-backed tech companies, particularly in artificial intelligence, have led the charge on expanding their office footprints, according to CBRE, with some looking for more than 100,000 square feet. AI funding accounted for more than 40 percent of the $25 billion in VC money in the second quarter, according to Transwestern. Last quarter’s figures were higher but “inflated” by the $10-billion Microsoft investment in OpenAI.
Unemployment remained below 3 percent in the second quarter with the biggest year-over-year gains in leisure and hospitality, education and health services. Office jobs were also up by 1.5 percent.
“Historically, with a labor market in such a strong condition, we would see the office market following suit,” said George Entis, Transwestern senior research manager, in a statement. “But even with the unemployment rate below 3 percent, we’re seeing that hybrid work and persistent recessionary fears have led to even more vacant space being added to an already struggling San Francisco office market.”
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