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Commercial
San Francisco

Past glory puts SF on top of ranking for office base asking rents 

“Counterintuitive” result stands in contrast to negative absorption and loan defaults.

SF topped the US in office asking rents in Q2. Here’s why.
(Getty)

Precipitous growth over the past decade is coming back to haunt San Francisco’s office market. 

According to brokerage firm Transwestern’s second-quarter U.S. office report, San Francisco registered the highest base asking rents in the country at $54.23 annually per square foot, displacing Manhattan, which typically tops the list. Manhattan placed second at $53.73.

It’s a surprising development for an office market coming off its worst quarter since 1997. During the second quarter, San Francisco registered negative absorption of 2.5 million square feet — the most of any metro market in the country, according to Transwestern. In April, office availability in San Francisco hit a record high of 29 percent, a CBRE report found.

George Entis, Transwestern’s senior research manager, said San Francisco’s place in the rankings is nothing more than a byproduct of growth from years ago. 

“It might seem counterintuitive that what many consider to be the worst-performing office market still has the highest asking rents, but that’s the case with San Francisco,” he noted. “In good part, it’s because the city had the highest rents at the start of the pandemic. So even despite San Francisco’s rent deceleration of 13.6 percent since the first quarter of 2020 — the largest of any major market — the region maintains the highest rents.”

Entis added this is “largely a result of tech growth in San Francisco during the previous decade which outpaced local economic growth by three times.”

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Also, the rankings are calculated on base rent, without the additional factors in a typical triple net commercial lease. The report states that coming out of the pandemic, “concessions remain high and leasing muted, obscuring the true cost of rent.”

The report also found that “asking rents continue to rise as landlords offer above average concessions in most major markets, which in turn puts downward pressure on the effective rent.”

Meanwhile, signs of distress abound in San Francisco’s office market. In July, lenders sued WeWork Capital Advisors, an affiliate of WeWork, to foreclose on 600 California Street, a 20-story office building in the Financial District. WeWork’s lenders claim that the firm fell behind on a $240 million loan.

Also, Shorenstein Properties missed a September deadline to refinance its $400 million mortgage on Twitter’s headquarters at 1355 Market Street. The firm was able to repay the loan in time to meet its early extension deadline in January. 

Earlier this month Presidio Bay Ventures bought an 11-story office building at 60 Spear Street in the Financial District for $41 million. By comparison, seller Clarion Partners had paid $107 million in 2014, meaning the company took a $66 million loss in the deal.