You Cannot Be Serious

Nope.  You can’t tell me my space is worth more now than it was pre-COVID.  You can’t tell me there’s limited supply.  You cannot tell me the market isn’t going to crash.  Aren’t we still in the midst of a global pandemic?  Didn’t your research team just publish a report indicating vacancy is north of 20%?   Aren’t companies cutting back on the amount of space they lease?  Aren’t landlords eager to negotiate, at any price, in order to keep their tenants?  You can’t tell me we’ve paid rent all through this pandemic even though we’ve barely used our space, and now, when our lease is expiring, we’re facing costs that are comparable to or worse than those we would have faced before this mess ever happened. No way. 
 
The San Francisco office market is highly segmented.  What does that mean?  It means the type of space you seek to lease will translate to a unique market experience that is distinct from that you would otherwise experience if you were seeking different space.  In fact, to enjoy the leverage you would expect in a 20% vacant market, you need to focus on sublease space or so called “commodity” space.  Sublease space accounts for 45% of the vacancy.  It’s a soft market.  Oh, it also comes with term limitations and risks associated with sublandlord default, sublandlord decisions to reoccupy the space and landlord recapture.  In other words, it’s usually got some hair on it.  Commodity space is the most common space in the market.  It’s the space located in the mid-rise and low-rise portions of buildings.    It often has limitations on outlooks and natural light.  You can access great leverage in both segments.  But if you are seeking premium view space, or quality 2nd generation space (especially professional services space), you’re in for a surprise.  Pricing is holding relatively firm or trending higher.  Why?  Because there isn’t much of it.  Supply and demand.  Market segmentation.  Landlords have access to tremendous amounts of data and they can easily slice and dice their availability by segment, enabling them to be more targeted in how they price their space.

So what are the segments?  They are:
 

• High-end view space in premium buildings

• Sublease space

  • Short term vs. long term

  • High quality vs. commodity

• Quality pre-built professional services space

• Commodity space

 
If you want to experience the kind of leverage that can be had in a 20% vacant market, go for the segments in which you can access such leverage.  If, on the other hand, you are focused on the segments in which leverage is limited, prepare to negotiate like it's 2019.