The "Gretzky Market"

Three forces have converged to create upward pressure on San Francisco office rents. Yes, you read that correctly: upward pressure.

First, solvent landlords with a reasonable cost basis and stable capital stack are ignoring the headline statistics. They know the market vacancy rate exceeds 30%. They don’t care.  They don’t have to. Vacancy is heavily concentrated in distressed and lower-quality assets, while leasing activity remains focused on a much narrower segment of available supply. Conditions in one segment of the market do not necessarily dictate outcomes in another.

Second, sophisticated data analytics are changing how landlords price space.  By segmenting demand and supply with far greater precision and providing real-time visibility into market activity, these tools allow landlords to make increasingly strategic pricing decisions. As discussed in last week's article on dynamic pricing, owners are no longer relying solely on historical lease comparables to establish value.

Third, and perhaps most important because it involves human behavior and compensation, we are hearing anecdotal reports that leasing and capital markets teams are entering a phase of the cycle where winning assignments increasingly depends on telling owners what they want to hear rather than applying conservative underwriting assumptions. Once this dynamic takes hold, it tends to reinforce itself as competitors begin marketing some version of "market-plus" pricing to secure new business.

When these three forces come together, landlord rent expectations can begin to detach from what can reasonably be viewed as current market value.

I call this a "Gretzky Market."

Wayne Gretzky famously said, "I skate to where the puck is going to be, not where it has been."

Today, landlords are beginning to ask occupiers to pay based on where they believe rents will be, not where they are now.