Nasdaq vs. San Francisco Office Rents: Uncorrelated

Way back in 1995 we began tracking the correlation between San Francisco office rents and the Nasdaq.  This has become a throw away datapoint since it rarely reveals anything new.  That is until Q2 2020.  This is when, for the first time in a quarter century, the Nasdaq and San Francisco rents have become uncorrelated.  What does it mean?
 
In simple terms, it means that many tech companies have continued to perform well through the pandemic, despite decreasing the amount of office space they occupy (resulting in more vacancy and lower rents).  To be sure, the tech sector is not done with the office.  Look no further than Meta’s recent leasing of 1.2M sf of Bay Area office space.  These companies will continue to hire and need space to house their employees.  But will they also continue to advocate strategies that enable a portion of their employees to work from anywhere?  If so, this may make it harder for landlords to chip away at high vacancy levels coming out of the pandemic.  Overall, landlords should cheer, not fear these lines crossing.  After all, an underlying tech economy that is performing well, albeit while its participants are occupying less office space, is far more favorable than the alternative which can best be illustrated by what happened in San Francisco in 2001, when the underlying economy took a nose dive.  Then rents fell off a cliff.  This is why rents have held relatively firm through the pandemic, thus far.  But it’s also true the as leases expire and companies look to reset on their space needs, vacancy may remain stubbornly high. 
 
The big disconnect is an economy that is performing without the office.  Our view of San Francisco is there will be a period of time over the next 24-36 months while occupiers can assert considerable leverage in solving for their office needs, but at some point toward the end of that window, as the pandemic has moved into the rearview mirror, the pendulum will swing more toward being in office and the presence of a healthy economy will, once again, begin to shift the market dynamic away from occupiers.