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South Bay and East Bay office markets outperform San Francisco: report

South Bay and East Bay office markets outperform San Francisco: report

SAN JOSE — The office markets in the South Bay and East Bay — while feeble in a post-coronavirus era — still 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 the performance of these markets before and after the coronavirus outbreak, according to a report prepared by Avison Young, a commercial real estate firm.

The benchmarks to compare the three regions 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, Avison Young determined.

Google Bay View campus on the grounds of the NASA Ames Research Center in Mountain View, May 2022. (Aric Crabb/Bay Area News Group)

“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.”

These are some key barometers of the health of the three markets before and after the coronavirus outbreak, 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 the pre-COVID trends, the average months of free rent have risen 26% in Silicon Valley, jumped 62% in the East Bay and skyrocketed 98% in San Francisco.

Downtown Oakland in an aerial view, May 2023. (Jane Tyska/Bay Area News Group)

— 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 the 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 COVID, 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 plummetted 16% in San Francisco.

San Francisco skyline, seen from Interstate 580 in Oakland, November 2022. (Ray Chavez/Bay Area News Group)

“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.

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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 bug 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, “The tides are beginning to turn” in the South Bay.