We're In A Pandemic, Why Is My Rent Increasing?

This is a common question for tenants looking to negotiate lease extensions in the current market environment.  Intuitively, they expect their occupancy cost to decrease due to the effects of the pandemic (e.g., higher vacancy, less demand, etc.).  However, they often fail to realize the point of impact, or the base values on which market softness has its affect, are values that were in place just prior to the pandemic, not values from 5+ years ago when they signed the original lease.  Most importantly, over the course of their lease, rents in the San Francisco office market appreciated 50% to 75%.  By way of example, let’s say a tenant executed a lease 7 years ago at a base value of $53/sf.  Over the course of the lease, the market for their space appreciated 65%, reaching a high of ~$87.50 (this would have been January of 2020).  When the  pandemic hit the market decline began at $87.50, not $53.  Today direct asking rents are off about 12%.  So the current market value for this space is in the upper $70s; whereas the tenant’s rent, after annual increases, is likely in the mid $60s.  Adding to this is the fact that in San Francisco, direct availability (not sublease) is about 10%.  This is why direct lease rates are only off about 12%.  Sublease space accounts for 45% of available supply.  These 2 markets (sublease vs. direct) perform differently as the parties have significantly different motivations.  The sublandlord is looking to mitigate cost as quickly as possible and the landlord is looking to preserve or enhance asset value.