SAN JOSE — The office markets in the South Bay and East Bay — while still feeble in a post-coronavirus era — outperform San Francisco’s moribund office sector in key benchmarks.
The South Bay and East Bay display a greater degree of health — or less weakness — than San Francisco, in a comparison of these markets before and after the outbreak of the coronavirus, according to a report prepared by Avison Young, a commercial real estate firm.
The benchmarks include the average size of an office lease, the length of a rental agreement and concessions that landlords make to tenants, such as free rent.
“Silicon Valley is the epicenter of tech with decades of tenants that have withstood various economic cycles with new innovations at the rebirth of each return,” said Dina Gouveia, Avison Young’s regional lead of innovation & insight. “It will be our bellwether coming out of this downturn.”
The South Bay/Silicon Valley region consists of Santa Clara County and Fremont. The East Bay consists of Alameda County and Contra Costa County, excluding Fremont.
These are some key barometers gauging the health of the three markets, according to the Avison Young research:
— Free rent. Since the coronavirus outbreak, owners of office properties are offering free rent that averages 2.4 months in Silicon Valley, 2.8 months in San Francisco and 3.8 months in the East Bay. Compared to pre-COVID trends, average months of free rent have risen 26% in Silicon Valley, jumped 62% in the East Bay and skyrocketed 98% in San Francisco.
— Lease length. Office building owners, since the COVID pandemic, have signed leases that average 62.1 months in the East Bay, 58.4 months in San Francisco and 49.9 months in the South Bay. But the length of rental agreements is down 7.5% in the East Bay and has dropped 4.6% in San Francisco. In the South Bay, however, the length of the average lease has risen 3.7%, an indication of rising strength.
— Lease size. Since the start of the COVID pandemic, office property landlords have signed leases that average 17,300 square feet in the South Bay, 14,700 square feet in the East Bay and 13,300 square feet in San Francisco. The size of the average lease has soared 27% in the South Bay, jumped 15% in the East Bay — but has plummeted 16% in San Francisco.
“Prior to the pandemic the suburban markets (the East Bay and South Bay) weren’t as overinflated” as San Francisco, Avison Young executive Gouveia said. As a result, she added, “we didn’t see as much giveback of space” in the South Bay and East Bay compared with San Francisco.
When the coronavirus outbreak erupted, state and local government agencies imposed wide-ranging business shutdowns throughout California and the Bay Area to combat the spread of the deadly virus starting in March 2020.
Those decisions chased workers away from their offices, leaving buildings empty in the Bay Area, California and worldwide.
Tech companies, in particular, aggressively enabled their employees to work from home or other locations removed from the office.
Plus, the tech industry deployed an array of equipment and services to enable non-tech employees to work from home.
Once the economic effects of the coronavirus faded away and shutdowns ended, companies staged an uneven return to the office.
The stop-and-go return resulted from corporate decisions to shed office space and the reluctance of workers to ditch their home workspaces and return to the corporate office full-time.
As a result, numerous companies dramatically curbed their respective appetites to lease office buildings. That, in turn, caused office vacancy rates to soar to record-high levels throughout the Bay Area. In San Francisco, about one-third of that city’s offices are empty.
“I expect Silicon Valley to recover before San Francisco as we are already seeing more return to office, lowering of rents, and stabilization,” Gouveia said. She added that “the tides are beginning to turn” in the South Bay.
