San Francisco’s tech industry is experiencing a shift in real estate dynamics as established companies downsize their office spaces while newer, fast-growing firms secure prime locations. Pear VC, a venture firm that recently closed its largest fund, has obtained 30,000 square feet of office space in the Mission Bay neighborhood through a sublease with file-storage giant Dropbox. This move is reflective of a trend where emerging companies are occupying more space in San Francisco as the previous generation of companies reduces its physical footprint.
Another example is OpenAI, the creator of ChatGPT, which has recently subleased two buildings from Uber, totaling 486,600 square feet. Uber, which initially leased four nearby buildings but is now right-sizing, will continue to occupy two of them. Likewise, Anthropic, a rival to OpenAI, has reportedly closed a substantial subleasing agreement. They plan to take over the entire 250,000-square-foot building that was previously the headquarters of Slack, a company acquired by Salesforce in 2021. Notably, Salesforce is an investor in Anthropic.
These subleasing deals are not solely based on personal connections. Pear VC’s co-founder, Pejman Nozad, notes that negotiations for their office space were purely a business deal. Nozad, who sold rugs for 17 years before entering the venture capital industry, leveraged his negotiation skills to secure the lease. This demonstrates that subleasing agreements in San Francisco’s prime areas such as Mission Bay and the Financial District offer an advantageous opportunity for well-funded, growing companies. Colin Yasukochi, an executive director at CBRE, a commercial real estate services firm, states that subleases in these areas currently range from $60 to $80 per square foot.
San Francisco’s commercial buildings currently face a vacancy rate of 35%, with more tenants leaving than entering. However, there seems to be a tipping point approaching. In the third quarter of this year, there was a negative net absorption of 1.85 million square feet, while the market demand reached 5.2 million square feet, the highest increase since Q1 2020. This shift can be attributed in part to newly established companies like OpenAI, which are attracted to sleeker office spaces in central locations at competitive prices.
Yasukochi anticipates that as the economy improves and interest rates decrease in the second half of the new year, tech companies will be positioned for faster recovery, which will have a positive impact on the city. The tech industry, known for being quick to cut costs during challenging times, is also known for its quick growth. This volume of growth is unmatched by other industries. However, Yasukochi believes that tech companies may not necessarily grow in San Francisco’s Hayes Valley, a neighborhood often associated with AI communities. Despite its resurgence, there is limited office space in Hayes Valley, and many tech teams currently utilize restaurants, bars, and apartments for their workspaces.
In conclusion, San Francisco’s real estate landscape is shifting as tech companies adapt their office needs. As established companies reduce their footprints, newer ventures are taking advantage of favorable subleasing opportunities, securing prime office spaces in central areas at competitive prices. This trend is contributing to a high demand for office space in the city, indicating potential for recovery as the economy strengthens.
