What's Happening with Office?

What is happening in the office space in large cities like San Francisco? What has happened in the last year? What is happening right now? Will we ever see any deals? Reuben Torenberg, vice president at CBRE, will share his insights.

You can read this interview here: https://bit.ly/2MgPK8T

I've been dying to speak with someone in the office space that is focused in large cities like San Francisco, to see what has happened with office over the last year, do you mind sharing with us what is going on in your world?

It has definitely been a change from anything we've experienced in our career. The market has been placed completely on pause since March of last year due to the pandemic. As soon as it happened, as in many other large Metro cities, there was a mandate from the city that stated no one can occupy office space. Since then, all the technology companies locally have at first tried to defer their rent or get free rent with landlords. And unfortunately, they were not very successful because these landlords also have bills to pay, they have mortgages to pay, they have to keep up the operation of their building.

Since then, just over 8.5 million square feet of sublease space has been placed on the market. As the months went by, rates dropped from the mid to high 80s to mid to high 70s. Then a couple more months passed and rates dropped to the low 70s, then a few more months passed and rates have dropped into the 60s. Now, for subleases, we are seeing rates at 30% lower than what they were back in March 2020.

I assume that there aren't too many defaults yet, is that correct?

That is correct. There hasn't been too many defaults, what some companies have tried to do is cut their losses and seek a termination. Although landlords had been very hesitant to do so because of all the uncertainty going forward, if you were to terminate, and landlords had other tenants waiting in the wings, that's one thing. And you can agree to a termination with a penalty of a couple months rent and feel confident that you'll get the space leased again. But without any end in sight, it's certainly much harder to have those conversations. At least 80% of these technology companies still have their space in the sublease market, or are hoping to come to an agreement with a growing technology company who can use the space once shelter in place is lifted, and rid themselves of remaining obligation without suffering too much pain.

Is it safe to assume that landlords are not hurting right now? And nobody's trying to sell their office building?

Yes, I would say they aren't hurting as much as they likely will be if this continues in another year, just because the market has been so hot over the last five years that they've been able to get deals at the rates that they want for long term to lock in security for the building. And those who are going to sell their buildings right now are looking at a pretty difficult selling market. So what we're really seeing mostly is landlords trying to hold on, and get past the uncertainty of the virus and see how efficacious the vaccine is before going back into into the market to sell their buildings.

And what is the sentiment regarding office in general in your world?

I certainly think that they will eventually bounce back. But the trend right now is leaning towards satellite offices in secondary metros like Austin, Salt Lake City, Denver, and even Miami. These companies want to retain their talent and give them a place to work besides their homes.

Reuben Torenberg

reuben.torenberg@cbre.com

https://www.linkedin.com/in/reuben-torenberg-b985b646/

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