San Francisco’s reign as the tech capital of the Bay Area suddenly looks dubious.

Over the past decade, San Francisco has surpassed Silicon Valley in attracting new tech companies, entrepreneurs, and younger workers who prefer the city’s lifestyle and attractions to the suburbs.

This trend is now showing signs of reversal. Office demand has declined in both markets as the coronavirus pandemic, slowing economy, and early success in working from home have led businesses to rethink office use. But San Francisco landlords have suffered more than their Silicon Valley counterparts in nearby cities like Palo Alto, Menlo Park, and Santa Clara.

Commercial real estate company CBRE Group Inc.

According to data from late February and late May, the volume of tenants looking for space in San Francisco has decreased by about 56%, compared to about 32% in Silicon Valley. San Francisco has also suffered more from businesses leaving the Bay Area for cheaper rents and other expenses.

It’s getting hit harder because its market is more dependent on startups that are still unprofitable, analysts and real estate managers say. These companies rely on venture capital, a severely diminished source of funding in a post-coronavirus recessive economy.

Many of San Francisco’s largest tech employers are in the transportation and hospitality industries, which have been particularly hard hit by the pandemic lockdowns. Companies like Airbnb Inc. and Uber Technologies Inc.,

who have major operations in San Francisco have announced major layoffs.

In Silicon Valley, on the other hand, there are more established technology giants like Apple Inc.

and alphabet Inc.’s

Google based. They have stronger balance sheets that allow them to keep planning their future expansion despite absorbing the hits during the pandemic.

“Most of the sublet space in Silicon Valley has more to do with companies moving to better quality space than companies that run out of space because they have reduced their size,” said Colin Yasukochi, head of new Tech Insights Center of CBRE.

As the Bay Area takes early steps to reopen its economy after three months of lockdown, there is also a growing barrage of sublet space in San Francisco as tech companies lay off workers, throttle expansion plans, or relocate jobs to cheaper markets. San Francisco now has the highest sublease availability in the country, according to data firm CoStar Inc. About 30% of the available space in the city is listed by tenants.

San Francisco-based startup KeepTruckin Inc., whose technology helps hauliers manage fleets and track driver behavior, announced in April that it had laid off around 350 employees, or 18% of its global workforce. According to CoStar, additional sublet space has been listed in the building by KeepTruckin.

More space is also expected to come out soon as companies like Juul Labs Inc. PG&E downsized and relocated Corp.

said this month it is slated to move to Oakland to end more than 100 years in San Francisco.

“It is likely that sublet space will continue to flood the market in the coming year,” CoStar said in a report.

In Silicon Valley, the problem isn’t that bad. While subletting increased from around 2.2% in the fourth quarter of 2019 to around 2.5% of the total market area, according to CoStar it is still well below the level of 3.5% in 2018.

With much of the San Francisco area still on lockdown, almost all of the leases signed since the pandemic broke out were in preparation. According to George Clever, who heads the office of Houston-based developer Hines, who owns buildings in Silicon Valley and San Francisco, tenants are demanding shorter rental terms of just a few years due to the great uncertainty about the US economy.

According to Andy Poppink, president of JLL’s Western Region, some landlords and tenants structure leases with short-term rents that reset once a clear market emerges.

Many of the decisions made by San Francisco-based companies to relocate employees outside of California were economically motivated.

Stitch fix Inc.

has decided to move 1,400 stylist jobs out of California because the cost of doing business in the state is high. Stitch Fix has no plans to reduce the size of its San Francisco headquarters.

Technology leaders like Facebook Inc.

Managing Director Mark Zuckerberg and Twitter Inc.

CEO Jack Dorsey is also threatening to disrupt the office markets and predicts that working from home will be a good option in the future, even as office buildings reopen.

“There is certainly an argument that high-rise office environments like San Francisco may lose demand in a more suburban setting found in Silicon Valley,” said Jesse Gundersheim, director of market analytics at CoStar in San Francisco.

Write to Peter Grant at [email protected]

Corrections & reinforcements
Stitch Fix Inc. has decided to move 1,400 stylist jobs out of California because the cost of doing business in the state is high. Stitch Fix has no plans to reduce the size of its San Francisco headquarters. An earlier version of this article incorrectly stated that Stitch Fix was planning to downsize in San Francisco. (Corrected June 16)

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