Google Signs One of San Francisco’s Largest Leases of Year for Eventual Return to Offices - Commentary by Ryan Harding
Search Engine Giant Expands Downtown as Tech Firms Begin Growing Again
Google is proceeding with plans to expand its downtown San Francisco footprint by 42,000 square feet. (CoStar)
Search engine giant Google plans to expand its downtown San Francisco office in one of the city's largest lease deals in the pandemic, signaling an appetite for more workspace among growing U.S. companies even as their staff remain at home.
A company spokesman confirmed to CoStar News that Google closed on a new 42,000-square-foot expansion at Two Rincon Center, an office tower at 121 Spear St. owned by real estate investment trust Hudson Pacific Properties, even as most of its workers won't return to the office until the middle of next year.
The additional space brings the company's footprint up to about 208,480 square feet in the downtown tower, where it is the property's largest tenant. The San Francisco Chronicle first reported the company's plans to expand at Two Rincon Center.
(CoStar)
The deal reflects an emerging trend among major technology companies including Facebook and Microsoft that are expanding their real estate even as they have announced many workers can keep doing their jobs remotely after pandemic precautions end.
"Growth companies like Microsoft and Facebook and mid-level or smaller companies that we work with need collaboration and production space, and you can't do that in front of a computer," Ryan Harding, Newmark Knight Frank executive managing director in Los Angeles who was not involved in the deal, told CoStar News last week before the Google lease disclosure.
Google's decision to expand its physical footprint in San Francisco is a reversal of a plan it laid out earlier this year to cut back on any future investments or hiring. This past July, the company said it would extend its work-from-home policy through July 2021 for more than 200,000 employees globally in a move many expected would delay the commercial real estate industry's eventual recovery.
Michael Appel, the Google spokesman, told CoStar News that the tech giant believes in the importance of bringing employees together in physical space, and views its offices as necessary for collaboration and company culture. Google plans to adopt a more flexible work model based on what it has learned since offices shut earlier this year, but the majority of its hundreds of thousands of employees around the world will continue to be associated with a particular office.
Google is the largest occupant of real estate in the Bay Area, according to CoStar data. The Mountain View, California-based company occupies a combination of at least 25 million square feet of office, flex and industrial space in the region.
Its delayed return to the office set off a domino line of other companies making similar decisions, and the tech giant's plan to continue its geographical expansion could ease other tenants into making similar moves.
Still, the fact that Google's new San Francisco 42,000 square-foot expansion lands among the top 10 office deals signed since the city's shelter-in-place order was issued in mid March underscores the challenges plaguing the city as companies let workers remain at home as confirmed coronavirus cases rise in states around the country. The dearth of major deals shows that corporate appetite for more office space may turn out to be limited.
This relative lack of activity is in stark contrast to the pre-pandemic period, when office absorption, or the amount of space taken off the market because of new tenants, hit record highs and totaled more than 2 million square feet throughout 2019 alone, according to CoStar data.
The city's office market, where growing tech companies used to battle over severely limited space, has been hammered over the past seven months because of companies' sudden shift to remote work, a massive influx of sublease availability and rents that continue to nosedive amid a decline in demand. According to CoStar data, average rents in the downtown San Francisco area have dropped 10% in the past 12 months, and vacancy has climbed to nearly 10%.
An increasing number of office tenants are now considering how little space they can get away with. E-scooter company Lime recently put its entire San Francisco headquarters up for sublease. Payment processor Stripe is also hunting for a subtenant interested in taking over its nearly 300,000-square-foot office at 510 Townsend St. as it prepares to relocate 10 miles away to South San Francisco, a cheaper alternative with more available space.
"A lot of tenants are frozen in place," said Robert Sammons, the senior director of Bay Area research for brokerage Cushman & Wakefield. "The work-from-home model in California, and especially San Francisco, has been an issue, and since March, we've seen a lot more space become available. Companies just don't need office space right now."
In future months, or possibly years, however, that mentality is expected to change.
Google's San Francisco expansion is just one of a handful of other real estate plans the company is pursuing throughout Silicon Valley.
For example, Google recently unveiled revamped plans for its proposed Downtown West development in San Jose, California, where its proposal includes up to 7.3 million square feet of gross commercial office space, up to 5,900 residential units and up to 500,000 square feet of retail, restaurant, community service and entertainment space.