San Francisco Startup Layoffs Mean More Office Subleases

SF’s office market is cooling down—for now

office subleases

Back in January, the New York Times reported that San Francisco office rents surpassed New York City’s.

But this trend was not meant to last. As of March, reports indicate that SF’s available office sublease space is up 50% from November, from 1.1 million to 1.7 million. These statistics correlate with recent troubles in the Bay Area’s startup scene: VC funding has slowed down, and less money equates to more layoffs.

Startups may not be folding left, right, and center, but we can see the squeeze that the lack of VC money is putting on them. Team downsizing means that the office market is cooling off; if tenants are scrambling to make a profit, subleasing their now-vacant office space is a good way to cut costs without harming their core business. At the same time, some companies are forced to lay off employees and pivot in order to stay afloat, regardless of how big their team was and how long their lease was. In a situation like this, they may be forced to sublease in order to keep their office in the first place.

Strangely, despite the sudden growth in the supply of office subleases, prospective tenants are not enjoying a huge discount. This is good news for property owners and for the SF real estate market: tenants are confident that they can still command a decent price for their sublease. In a true down economy, confidence would be shakier and markdowns would be rampant. As it stands, the Bay Area office market is still a seller’s market.

Likewise, commercial real estate development is still going strong. In a down economy, some developers would stop their projects, predicting that the eventual leases wouldn’t be high enough to provide a meaningful return on the cost of construction. In the Bay Area, SF received 1.2 million new square feet in Q4 2015 alone, and several more developments are still underway. Developers are confident in forging ahead with their projects, signaling confidence that the office market isn’t in a bubble.

office subleases

There’s an upside to the office market’s healthy dose of skepticism. Skyrocketing property values in the Bay Area have been causing trouble for everybody but investors; while a full-fledged crash would hurt the whole economy, a slight slowdown would actually benefit startups looking to get off the ground. The current abundance of subleases offers new companies a chance to grab SF office space at an affordable price.

If the market can hold its position without crashing, this trend may work out for startups on both sides of the spectrum. Established companies need to control their cash flows until VCs regain confidence in the market, and new startups need affordable office space that won’t blow a hole in their seed round budgets. For the time being, office subleases are a win-win solution.