City Sublease Availabilities Keep Falling

SAN FRANCISCO-Sublease office availabilities here have been on the decline and now stand at 2.25 million square feet, 61% (1.37 million square feet) of it currently vacant and about one-fifth of it expiring over the next 12 months, according to a new report from Colliers International. The total has been declining since August, when it peaked at 2.72 million square feet. To date this year, 1.8 million square feet of space has been listed for sublease, with about 40% of it coming to market already vacant.

“There definitely appears to be more demand for it, especially shorter-term subleases on the part of the tech sector,” Marty Melbardis, a first vice president with Colliers who represents both tenants and building owners. “They are looking for great economics but they prefer the two- to three-year term, or even less in some cases, because it fits their business model, which typically call for rapid growth.”

There are currently 308 sublease office listings in the market. The average sublease size is 7.316 square feet. The average term is 33 months and the average time listed is approximately nine months (260 days). About 20% of the total sublease listings (63) and about 20% of the sublease space (473,023 square feet) is tied to leases expiring within the next 12 months.

“As these leases being marketed for sublease expire and go direct, it could cause more distress for owners but it could also help stabilize the market from a rental rate standpoint,” Melbardis says. “You’re no longer going to have those $12- to $18-per-square-foot sublease asking rates being averaged in and the rate on that space instantly goes to $30 per square foot.”

In the past 40 days, 94,681 square feet in 27 sublease offerings have been added to the market while 128,408 square feet of sublease space was leased in 10 deals. Notable additions to the sublease market include 22,500 square feet on the lower floors of 501 Folsom by Shaba Games LLC; 17.387 square feet on the 20th floor of 345 California St. by Sutter Health; 14,287 square feet on the fifth floor of 580 California by Hands On Mobile LLC.

Notable subtractions from the market in the past 40 days include Babcock & Brown Airline Management subleasing 28,730 square feet on the 33rd floor of 525 Market Street from Oracle; Zoom Systems subleasing 20,882 square feet on the 15th and 16th floors of 22 Fourth Street from Macy’s West; Zoosk subleasing 21,492 square feet on the 10th floor of 475 Sansome Street from Yahoo; Bay Equities partners subleasing 13,529 square feet on the 3rd floor of 88 Kearny Street from Thomas Weisel; and HAS Partners LP subleasing 12,060 square feet on the 23rd floor of 199 Fremont from Fremont Group Management LP.

Macy’s Wets put 11 floors on the market. In addition to Zoom, there is reportedly at least one other deal in the works. “It sounds like they are getting some good tour activity because the asking rates are very attractive in the high teens and there is about five years of term remaining,” Melbardis says.As of the end of the third quarter, there was 82 million square feet of office space tracked by Colliers in San Francisco and of that total 10.5 million square feet was vacant on a direct basis.