TenantSee Weekly: The Artificial Floor
Currently, there’s a lot of downward pressure on rental rates in the San Francisco office market. This is caused by a massive uptick in available space (4% to over 30+%), the proliferation of subleases in which the sublandlord is motivated to mitigate cost, not achieve target NOI, and the presence of owners having a materially lower cost basis, either through a long-term hold strategy, or a recent acquisition at steeply discounted pricing, both of whom can compete at much lower rental economics. Indeed, the economics being offered by these parties stands in stark contrast to those offered by landlords who bought or refinanced in the years running up to the pandemic. This latter category, by the way, encompasses a large swath of the market. These investors are struggling against a confluence of factors, including rising interest rates, maturing debt, rising insurance costs, decreased demand, lack of capital, and valuation outcomes that put equity and debt underwater.
TenantSee Weekly: How to Protect From Landlord Default?
Office building owners are facing the most challenging environment of the past 50 years due to substantial reductions in demand for space. The shift in demand is not cyclical; it’s a systemic shift caused by changes in how work is done in the information economy. In other words, investors can’t count on a swift reversion to the norm. This dynamic is playing out globally. There are geographic differences, but the fundamental trend is the same. The impact on office investors has been swift and brutal, leaving many in a precarious financial position.
