The last time she tried to sell the building was in 2019. Today, the office market is a whole different ball game.
By Wolf Richter for WOLF STREET.
The office market in San Francisco – the epicenter of work-from-home and head office moves – has been in a tough spot since before Covid, and it’s gotten much worse. At the end of the second quarter, almost 28% of the total office space was on the market available for rental. Only slightly less terrible than the office markets in Dallas/Fort Worth and Houston.
But since the end of the second quarter, many new office spaces have been abandoned on the sublet market. Salesforce put 412,000 square feet in the Salesforce West tower on the market in July, which is about half the space in its headquarters. Twitter told employees in July that it would close an entire building. Almost every day, more and more technology companies are trying to reduce their footprint in San Francisco.
Now Craigslist is there. And the price situation is interesting.
Craigslist has put a nine-story, 135,200 square foot office building on the market at 222 Sutter Street for the second time, according to The register. The building, located in the northern financial district, also has some commercial spaces. So good luck with that in this neighborhood. This time around, his asking price is $60 million.
Craigslist is not in this building. Its headquarters are on Market Street. For Craigslist, this building is an investment property. She rents the building to other tenants. But the building is only 22% occupied.
Craigslist bought the building in 2012 for $53.8 million. The new asking price is just 11.5% higher than the selling price 10 years ago. Even a minor further reduction in price, after fees and closing costs, could completely wipe out any gains.
Craigslist attempted to sell the building in late 2019. The office market in San Francisco had peaked in early 2019, and by Q4 2019 the overall availability rate had begun to rise from a low 8% range. at the start of 2019 to almost 10%. At the time, Craigslist’s asking price was $100 million. At that time, the building was 68% occupied. When Craigslist couldn’t sell the building, it took it off the market.
It’s a whole different ball game – hence the 40% price reduction.
When the building was first listed, the availability rate on the San Francisco office market was less than 10%; now it’s 28% and getting worse pretty much every quarter.
In 2019, the building was 68% let; now it’s 22% rented.
Asking rents for Class A offices – what this building is considered to be – have fallen about 15% since the end of 2019, according to Savills.
Despite the decline, to around $75 per square foot per year for Class A buildings in San Francisco, office rents remain extremely expensive and are still a huge disincentive to office rentals in San Francisco, especially when working from home is a functional alternative for many. businesses.
The vacancy rate and projected future vacancy rates once leases are terminated across the city and even more space on the market are so gloomy that there are currently discussions, including with officials of the city, on how to convert part of this vacant office. from space to housing, because what else are we going to do with it?
Investors in office buildings must ask themselves the question: how far should rents be lowered to attract tenants in this environment? And they have to ask themselves: at what price do we have a reasonable chance of making money from this building, given this situation?
Obviously, being 22% occupied now, the rents for the building are nowhere near low enough to fill the building.
Many tech companies have put a lot of sublease space on the market that they just want to get money for during the remaining years of the lease, and they’re pricing that office space more aggressively even s ‘there aren’t many tenants looking for offices. It will be the competition.
At this point, it’s really hard to try to figure out what the equilibrium price might be, with the market as messy as it is – still horribly overvalued and still horribly vacant. And this 40% reduction in the asking price, which is almost back to the purchase price ten years ago – as huge as it is – is just another effort to stimulate interest and find the price of balance in this environment.
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