Is San Francisco’s hot real estate market showing signs of trouble? According to a note to its clients, analysts at Morgan Stanley through their leader Vance Edelson said that the tech IPO slowdown has started some concerns that one of the hottest real estate markets might be ready for a pause.Edelson and his team looked at commercial real estate market wherein rents have risen by about 70% since 2009.Demand has consistently been robust as proven by only 6.5% vacancies in the cities’ office space.
Edelson and his team wrote that robust demand since the Great Recession has been in question because the pickup in subleasing earlier this year including the weaknesses in the AlphaWise survey that was done earlier in the week and tech IPO slowdown is now in the spotlight. Office absorption tracks the IPO market overtime but there are strong mitigating factors that include strong pre-leasing of new space, constraints in future development and vacancy that is still considered to be very close to historic lows.
Edelson and his team have also charted the number of tech IPO’s against commercial net absorption rates to be able to measure the difference between office spaces that have been just vacated and office space that has just been occupied. Based on the chart, the pace for new tech IPO’s have slowed down most particularly with tech space where over half of the companies that are filing for SEC are said to have disclosed material weakness.
Disclosing material weakness usually means problems with a company’s financials although it is not a sign that the company is in a bad state. They are just being realistic about their condition although this is not a positive sign for the market. According to the report, sub-leasing increased to 1.4 million square feet of office space or 1.5% of available stock which means that companies occupying large amounts of space are sub-leasing to smaller tenants in order to supplement their leases.
It is expected though that the market will remain fairly balanced although it is clear that the market is slowing down. The market is facing some problems finding enough tenants to occupy 7% of current available space.