OFFICE AVAILABILITY more than doubled in 2020 to 23.8%. In particular, sublease availability rose 550 basis points YOY, standing at 9.1% at the end of 2020 for all building class types.
DIRECT ASKING LEASE RATES dropped 7.1% YOY, the first time in a decade that rental rates fell in the San Francisco office market. By Q4 2020, asking rates were reported at an average of $63.80 full service. Class A rates fared higher, closing 2020 with an average rate of $74.26 full service.
LEASING ACTIVITY decreased 73% in 2020, reporting 3.12 million SF at the end of 2020. Total Class A lease activity stood at 1.5 million SF by year-end, with sublease activity reaching 370,000 SF.
COMPLETIONS in 2020 fell dramatically, with only one new project arriving in San Francisco following strong years of office deliveries in 2018 (3 million SF) and 2019 (1.5 million SF). 300 Grant Avenue delivered 71,000 SF in the Union Square submarket in Q4. However, 3.5 million SF of under construction space remains in the market, with several projects scheduled to be completed in 2021, including Hearst’s 5M project at 415 Natoma, which is anticipated to deliver 640,000 SF of prime Class A space in the Yerba Buena submarket in early 2021.
COVID-19 caused multiple business closures and company layoffs in 2020. Remote working became the new normal in San Francisco, with several tech giants, such as Twitter and Square, going a step further by announcing permanent workfrom-home policies.
The pandemic prompted restrictions on indoor dining and non-essential office work, sharply dropping economic activity in San Francisco. By the end of 2020, California unemployment stood at 7.9%, with San Francisco reporting a 5.7% rate.
The San Francisco office market will remain inhibited by COVID-19 in 2021 as companies continue to allow their employees to work remotely. Rental rates are expected to further decrease due to lack of demand and oversupply of available space, both direct and sublease. Given the depressed market fundamentals, we expect there will be a “flight to quality” phenomena as tenants look to lease the best spaces at reduced rents. Market concessions will continue to rise as landlords try to capture what little tenant demand exists.