The latest hit to San Francisco’s limping office market came in the form of a regulatory filing in which social media company Pinterest announced it was pulling out of a major SoMa lease that was supposed to run until 2033.
The company is subleasing the 150,000 square feet it has at 505 Brannan while trying to negotiate an early termination, and earlier decided against renewing a lease at 410 Townsend St. and closed its office at 149 Bluxome St.
Preliminary data from real estate company CBRE showed that the office vacancy rate—already at record highs—have continued to tick up in San Francisco. In the first quarter of 2023, vacancies rose to 29.5% and researchers say the number is likely to grow next quarter.
As a point of comparison, the vacancy rate in the first quarter of 2022 was 19.7%. The figure for 2019 was under 4%.
Pinterest’s office reductions are part of a larger “restructuring plan” that also includes the company’s decision to lay off around 4% of its employees in February.
Making those changes doesn't come cheap. Pinterest expects the restructuring plan to cost up to $125 million in the form of lease abandonment charges and other related costs.
All that is on top of aborted plans for 88 Bluxome St., a planned million-square-foot mixed-use building that Pinterest had once planned to make its new headquarters.
Instead of forging ahead, the company paid around $90 million to developer Alexandria Real Estate Equities to get out of its 490,000-square-foot pre-lease for the building.
The site is currently a fenced-off lot of concrete after Alexandria paused construction. Real estate sources say they’re doubtful that the project will go forward—certainly anytime soon—with the departure of its anchor tenant.
Pinterest is just one of a number of companies that have undergone similar “restructurings” that involved ditching real estate in San Francisco. Salesforce, the city's top private employer, detailed its own office downsizings in its annual report.
As of Jan. 31, Salesforce’s San Francisco headquarters office included around 1.6 million square feet of leased and owned property. That number excludes the 1.5 million square feet the company is currently subleasing or has made available on the sublease market.
There was an additional 900,000 square feet of San Francisco's sublease space added to the market in the first quarter, according to CBRE, bringing the total to 9.8 million square feet. That brings the availability rate, which includes direct vacancies plus sublease space, to 34.9%.
“Many businesses face economic pressures and are proactively reducing their expense structures, which include workforce and office space costs,” said Colin Yasukochi, the executive director of CBRE’s Tech Insights Center.
“This will cause the vacancy rate to rise through year-end, with effective rents easing as property owners offer qualified tenants more incentives to lease space.”
That growing tally, and its negative impact on the city’s budget, has put pressure on policymakers to figure out what’s next.
Recently introduced legislation from Mayor London Breed and Supervisor Aaron Peskin is meant to streamline the process of turning empty office buildings into housing and to rezone Union Square to open up the types of uses allowed in the shopping district.
New research from public policy organization SPUR and architecture firm Gensler evaluated a sample of Downtown San Francisco buildings and found that 40% were good candidates for conversion, raising the potential to create more than 11,000 new units in the city’s central business district.
Of course, there are many barriers in the way, including high development costs and subpar economic conditions, which make it exceedingly difficult to get new projects financed in San Francisco.
“I don’t want anybody to think that office-to-residential is going to be a panacea, and we can flick a switch to create 10,000 new units overnight,” Peskin said. “But I would hope in a half-decade, we’ll see a bunch of conversions, an injection of the arts and real placemaking creating interesting nodes Downtown.”
Kevin Truong can be reached at firstname.lastname@example.org