Menlo Park Leads the Nation in High-Price Office Rents

Office rents in Menlo Park — especially along venture capital highway Sand Hill Road — are so high they are pulling up the entire San Francisco metro market averages, according to data from Yardi subsidiary CommercialEdge.

In a recent report, Commercial Edge dubbed San Francisco the most expensive office market in the country, beating out New York City. But that’s only because the metro also includes hot suburban markets on the Peninsula, explained Peter Kolaczynski, the commercial real estate software company’s associate director of Commercial Data.

“Sand Hill Road is pulling the region up while the city is dragging it down,” he said.

In an era of increased concessions, Kolaczynski said asking rents are not the best barometer of a market, but they are still a useful data point. He tracks 120,000 office listings nationwide and said it is far more common for brokers to first advertise and later remove asking rates than it used to be.

That said, some of the top submarkets in San Francisco have asking rents under $60 per square foot a year, while asking rents in Silicon Valley are close to $90 and over $100 in Menlo Park, according to his data.

Sand Hill Commons on Sand Hill Road in Menlo Park had the highest office listing nationwide this fall, with an average asking rent of $204 per square foot.

“The suburban success versus urban struggle continues to be the narrative for the SF area,” Kolaczynski said.

Suburban office appeal

The pandemic really benefited markets such as Menlo Park, which used to be called “Menlo Dark,” due to its sleepy reputation, said Kabir Seth, COO of developer Presidio Bay Ventures, which took over the 6.4-acre mixed-use Springline development in downtown Menlo Park in late 2020. The flight to the suburbs led to an increase in satellite offices for companies previously headquartered in larger markets like San Francisco, he said. As a result, more amenities opened that cater to those now living and working on the Peninsula, increasing its desirability as an office location.

Add to those factors the fact that Sand Hill Road “continues to occupy an important and iconic place in the market given that it is still home to many of the world’s leading investment firms, and a symbol of the venture capital and private equity industry,” he said.

The tech and VC sectors are “intertwined” because tech needs to be close to capital and talent from Stanford and Berkeley and “the stewards of capital need to have their fingers on the pulse of the next big company while it is still in its very early stages,” Seth said. These tenants are “very price insensitive,” he said, and have “both the ability and desire to spend more on rent in order to be as close as possible to the country’s premier nerve center of capital and talent.”

“When you combine the relative spending power on a per-employee basis at both these [sectors’] firms with a naturally supply-constrained market due to zoning and density limitations, you have a recipe for strong rents,” he said.

With high rents come high sales prices. In October, the 133,449-square-foot Sand Hill Commons sold for an all-cash deal of $222 million or about $1,600 per square foot to Norges Bank Investment Management, Norway’s sovereign wealth fund. That sale, along with a few other outlier office sales in Mountain View that went for more than $500 per square foot, helped bring the San Francisco metro average up to $392 per square foot — the highest office sales price average in the country, according to Yardi data. Miami took second place with an average price of $369 per square foot, followed by Los Angeles at $354 per square foot.

Breaking down the metro data further, average sale prices were about $274 per square foot in San Francisco’s CBD, $331 per square foot in its broader urban markets and $471 per square foot in suburban markets as of November, according to Yardi data.

“I think you’re in the deal hunting stage,” Kolaczynski said of San Francisco office sales, “where if the price is reduced enough you can elicit interest, but far away from a rebound still.”

Presidio Bay got one of those deals, paying $41 million in 2023 for 60 Spear Street, a nearly 160,000-square-foot downtown building that last sold for $107 million nine years earlier. It plans to put another $50 million into turning the 11-story building into a fully amenitized “office resort”.

Youth factor

As pandemic memories fade, companies have realized younger employees want to be near the denser, urban environments that “serve their personal social and cultural needs,” Seth said. These workers do not want to commute to the suburbs and likely cannot afford to live there, which is why many new AI companies are “increasingly choosing to establish their headquarters in San Francisco proper given the deeper pool of younger engineering talent that wants to live in an urban environment.”

That gives San Francisco offices “an irreplaceable advantage over suburban campuses,” but that doesn’t mean a return to the old days where any old space in the city will do, he said.

Catering to “the main pillars of tenants’ needs” — health and wellness, community and productivity — will require making significant investments in features such as collaborative and flexible workspaces, amenities that address both physical and mental health needs and, most of all, a proactive building manager that fosters engagement amongst the building occupants.

That’s not just true in San Francisco. Given some of the aging office stock on the Peninsula, even prized locations along Sand Hill Road will need to step it up, he said, citing leases signed by firms like Norwest Ventures, STG Partners, Menlo Ventures, Highland X and others at Springline due to its “holistic set of offerings without sacrificing proximity to the technology ecosystem.”

“Sand Hill Road is no longer seen as the end-all, be-all for tenants who are instead finding what they need in newer locations,” he said.