Generous dollops of doom and gloom from the local commercial real estate world this week, courtesy of Cushman & Wakefield’s Marketbeat for the first quarter of 2021. It would take the most sublime shade of rose-colored glasses to put a positive spin on these numbers — 18.7 percent vacancy rate in San Francisco (it was at 6 percent in the first quarter of 2020); 7.87 million square feet of direct vacancy and 7.99 million of subleased space. That’s almost 16 million square feet of ghost town, representing more than a billion dollars of lost revenue at Q1’s average asking price of $73.76 per square foot.
It’s bad, the product of the new COVID-borne Work Revolution — and found money for corporations, freed from bloated footprints and getting kudos for adapting to the New Way of Life. The potential long-term social impacts of this commitment to isolation? That’s a story for another time. For now we’re faced with a conundrum: What do we do with all of this empty office space?
It’s definitely an unusual time in the world of commercial real estate, but lest we’ve forgotten under the barrage of last year’s bad news, we are an adaptable species. We take the hit, we assess the damage, we figure out our response. Remember your first Zoom happy hour? Seemed weird at the time.
Last week a curious email came across my desk, from an investment firm touting investments in commercial real estate. “Weird timing,” I thought, but then I thought more. I did some Googling. Forbes is also touting the opportunities in commercial real estate. Someone feels good about this because, unlike those of us who’ve been trained to think office space equals commercial space, there are many uses for commercial real estate besides setting up cubes for white-collar workers.
Businesses adapt and for them, commercial real estate in crisis is an opportunity; but who will step up and take advantage?
How about Amazon who, of course, needs endless space for distribution centers? In a move reeking with irony, Amazon has been buying up dead malls — 25 of them since 2016. So far this year, Amazon has gotten approval to convert almost 4 million square feet of expired mall in Baton Rouge, Knoxville and Worcester, Mass. But Amazon probably can’t retrofit our soaring financial towers into distribution centers. They’re too vertical.
Enter the life sciences industry. Yes, Amazon and Big Pharma, along with a little good old-fashioned manufacturing, are going to save us. Why did KKR, a private equity firm, just pay $1.1 billion for a building in Mission Bay that is 98.4 percent leased by Dropbox when Dropbox, who bugged out of the building last March, has no intention of ever using the space? Because life sciences concerns, in this case Vir Technologies and BridgeBio Pharma, have been subleasing space for labs and manufacturing. You can’t make drugs over Zoom and I don’t know if you’ve noticed, but drug manufacturing is on people’s minds right now.
We could always convert everything into apartments. It’s not a new idea — modern SoMa was founded on it — and there’s plenty of demand for it. It’s not like you wave a wand and suddenly solve the housing crisis AND the commercial crisis at once, though. Conversion is expensive. Someone has to pay for it and they’ll want to turn a profit. Those office buildings have views, you know.
Finally, there is a sense that eventually businesses will see value in face-to-face employee interaction (and bargain leasing rates) and bring some of them back to work. Maybe they can revolutionize the workspace without sending everyone home.
It’s definitely a nervous time for commercial real estate but it could be exciting as well. There’s no magic bullet to save the industry but there are options that could, in the end, create a downtown whose range of uses is so diverse that calling it “The Financial District” will become a charming anachronism.
Larry Rosen is a San Francisco-based writer, editor, podcaster and recovering former Realtor. He is a guest columnist and his viewpoint is not necessarily that of the Examiner. The Market Musings real estate column appears every other week.