Offices up for sublease in SF fall to 7.8M sq ft, first drop since 2021

Key Takeaway

• San Francisco's office sublease inventory is expected to drop to 7.8 million sq ft by Q2, the first decline since 2021.
• Major sublease deals include Adyen's 150,000 sq ft from Pinterest and Scale AI's 180,000 sq ft from Airbnb.
• The AI sector drives demand for flexible subleases, indicating growing momentum for new office space in SF.

Sublease Inventory Declines in San Francisco

After four years of increasing office sublease availability in San Francisco, the market is finally seeing a decline. According to preliminary figures from Cushman & Wakefield, the inventory of offices available for sublease is expected to drop to 7.8 million square feet by the end of the second quarter, down from 8 million square feet in the previous period. This marks the first time since late 2021 that the city's sublease inventory has not grown from one quarter to the next. Robert Sammons, senior director of research at Cushman & Wakefield, attributes this decline to small chunks of sublease space converting to direct available leases and a surge in subleases driven by the fast-growing artificial intelligence sector.

The Role of AI and Startups

The artificial intelligence sector has become a significant driver of sublease deals in San Francisco. Startups, particularly in the AI space, are seeking shorter-term leases, typically ranging from three to four years, due to uncertainties about their future growth. This trend is evident in several substantial sublease deals this quarter. For instance, fintech company Adyen signed a long-term sublease for 150,000 square feet of office space at 505 Brannan Street, with Pinterest as the primary tenant. Additionally, Scale AI subleased 180,000 square feet from Airbnb at 650 Townsend Street, a space that had been on the market for two years.

Smaller Deals and Market Flexibility

In addition to the larger sublease deals, several smaller transactions have also contributed to the absorption of sublease space. Zendesk subleased 40,000 square feet at 181 Fremont Street from Meta, while Capital One took on 20,000 square feet of subleased offices from cleantech firm Stem at 100 California Street. These deals highlight the growing demand for flexible office space in San Francisco, as tenants prefer the adaptability offered by subleases over direct leases. Roman Adler, a locally based executive with Newmark, noted that this trend suggests a growing momentum around demand for new offices in the city, which currently has a vacancy rate of 36.6 percent following a broad shift to remote work.

Implications for San Francisco's Office Market

The decline in sublease inventory and the surge in sublease deals indicate a shift in San Francisco's office market dynamics. The demand for flexible office space, particularly from AI startups and other tech companies, is driving this change. This trend not only reflects the evolving needs of tenants but also signals a potential stabilization of the office market. As new tenants are willing to pay for sublease spaces, it suggests a renewed confidence in the market's capacity for growth and innovation. This development could lead to a more balanced market, with a gradual reduction in vacancy rates and a more diverse tenant base.

Street Views

• Robert Sammons, Cushman & Wakefield (Neutral on the San Francisco office sublease market):

  "We’re seeing a lot of startups still wanting shorter terms. AI companies are specifically looking for not one to two years, but three to four years, because they’re not sure how big they’re going to be."

• Roman Adler, Newmark (Cautiously Optimistic on demand for new offices in San Francisco):

  "The recent subleases suggest tenants in San Francisco want flexibility, something they’re more likely to find through subleases than direct leases... It also suggests growing momentum around demand for new offices in San Francisco."