Quality Gap: Rents Soar at SF’s Top-Tier Office Buildings

Asking rents for San Francisco offices have fallen over the edge. The good news: trophy offices generally aren’t among them.

Average asking rents for all kinds of offices in the city have fallen more than 15 percent since the end of 2019 to just under $70 per square foot in the fourth quarter, the San Francisco Business Times reported, citing figures from Cushman & Wakefield.

Between October and December, the average asking rent for Class A offices in the city was $74.83, down 14 percent from the same period in 2019.

At the same time, asking rates for top-floor offices in the city’s most desirable office towers rose to $134.77 per square foot, up 3.6 percent from the close of 2019.

The trophy offices known as Class A, Tier 1 were the only sector within San Francisco’s office market to have surpassed pre-pandemic rates.

The office category includes 10.6 million square feet across 15 trophy buildings in Downtown, Robert Sammons, senior director of research at Cushman & Wakefield, told the Business Times. The $134.77 per square foot average asking rent is for space with 360-degree views.

The Tier 1 category includes One Market, 555 California Street, 101 California Street, the Salesforce Tower and the Transamerica Pyramid.

“The best location, the best systems and the best amenities all play into that,” Sammons said. “That is what Tier 1 is all about.”

Tenants are seeking space in Tier 1 properties in an attempt to lure employees back to in-person work, Sammons said, a movement that has become known as the flight to quality.

The widening gap between commodity offices and trophy offices, Sammons said, includes the divide between regular Class A offices and “the best of the best.”

“We call it the trifurcation of the market,” Sammons told the Business Times. “Those trophy-quality buildings — they’re performing above everything else.”

The vacancy rate among Class A, Tier 1 offices with full views last quarter was 3.1 percent, Sammons said. Vacancy across San Francisco’s 86 million-square-foot office market during the same period hit 32.5 percent. Another estimate by CBRE put it at 35.9 percent..

New York-based Shvo, now conducting a $400 million renovation of the 853-foot Transamerica Pyramid and two adjacent office buildings, continues to push the envelope when it comes to office rents.

Founder Michael Shvo told the Business Times last month his firm had done “multiple” lease deals for more than $200 per square foot, and that Shvo expects the next lease in the building will close at around $300 per square foot.

— Dana Bartholomew