Companies flock to luxe downtown building while vacancies abound elsewhere

In an example of how much better premier downtown San Francisco office buildings are faring compared with less high-class offerings, several companies have signed leases at The City’s historic former Pacific Telephone and Telegraph Co. building in recent months, bringing the site to 82% occupancy.

That’s far higher than the average occupancy rate in the downtown core, which has recently been just under 34%.

The iconic 26-story art deco tower at 140 New Montgomery St. — with its sculpted exterior and ornate, gilt lobby — was famously the headquarters for the online review service Yelp after undergoing a massive renovation during a time when technology companies were locating operations in San Francisco like never before and transforming The City into a tech capital.

Yelp departed the building in 2021 after the COVID-19 lockdown. It adopted a remote-first work model that gave the majority of its employees the option of whether to come to the company’s offices for work. Yelp, which had occupied 13 floors, moved into smaller quarters at 350 Mission St..

Yelp’s move reflected a broader trend of companies in San Francisco and other parts of the country adopting hybrid remote-work schedules and giving up office space — a trend that continued through the first quarter of this year, when The City’s overall office vacancy rate hit a record 36.7% , according to commercial real-estate firm CBRE.

The trend has been very uneven , however, with “Trophy Class A” buildings such as 140 New Montgomery faring better than the market as a whole, posting a collective 15.7% vacancy rate at the end of the first quarter, according to a CBRE research note from April.

By contrast, “non-prime” buildings had vacancy rates higher than 40%, CBRE said.

“This cycle is like past cycles where tenants seek out higher quality space when supply is more abundant, then go to the next best alternative as supply dwindles,” the company said. “The highest quality office buildings in San Francisco have less supply, relatively more demand and may become a leading recovery indicator.”

When 140 New Montgomery opened in 1925, it was The City’s tallest skyscraper at 435 feet, and it became a symbol of technological prowess and progress. Today, in addition to a luxurious lobby, it has an acclaimed restaurant on site and other amenities that include a private courtyard, locker rooms with showers, and space for bicycle storage.

Its location is also a selling point. The building is within walking distance of the San Francisco Museum of Modern Art, the Salesforce Transit Center and park, and the Yerba Buena Center, among other downtown attractions.

Since 2021, CBRE has completed 15 leases across 18 floors of 140 New Montgomery, for a total of 197,395 square feet. The building has a total of 298,500 square feet available.

The newest tenants were super{set}, a “startup studio” that produces companies focused on data and artificial intelligence; Calendly, an online scheduling-platform provider that is also remote-first and wants space for team gathering; and Heidrick & Struggles, a senior-level-talent search and advisory service, according to CBRE and Pembroke, the international firm that operates the building. Two companies have already moved in, while construction is underway for a third.

Collectively, the three companies took 55,913 square feet, leaving only 54,185 square feet available for lease. In addition, Bloomberg — the building’s largest tenant — renewed its lease. All four companies signed within the last nine months.

Tom Chavez, founding general partner at super{set}, said his company was growing and needed more space, which it found at an attractive price at 140 New Montgomery. He said the layout and details promote fruitful teamwork.

Chavez said that sort of ferment is essential for super{set}, which was previously located not far away in the 100 block of Geary Street and which has launched 14 companies, one of which sold for about $200 million.

“With the exposed brick and the natural flow of the space we’re in, it promotes a lot of connecting and colliding,” said Chavez, who moved into his company’s new offices four months ago. “It sounds a little elusive, but the space really creates the soil conditions for superb collaboration to happen.”

Chavez said it’s good for his business to be downtown with so much artificial-intelligence activity happening in the area. He also said he has loved San Francisco since becoming a resident nearly 30 years ago, and he is glad to be part of the local “renaissance” he sees underway.

“We believe in San Francisco,” Chavez said. “We know it’s on the rise, and I know that there will be a lot of other companies and people coming here to this area very, very soon. I already see them on the street.”

CBRE said the San Francisco office market is beginning to transition out of a four-year downturn. In the first quarter of 2024, companies sought 6 million square feet of space, up from 4.2 million square feet in the fourth quarter of last year and 3.4 million square feet in the first quarter of 2023. Artificial-intelligence companies accounted for 28% of total leasing activity in 2023 and remain a significant source of demand in 2024.

Demand for space in April was rising “much faster than supply,” with prospective tenants seeking 6.8 million square feet of space, approaching the pre-pandemic peak of 7.1 million square feet in 2019, CBRE said. That was up from 4.2 million square feet in the fourth quarter and 3.4 million in the first quarter of 2023.

Those numbers suggest that leasing activity is on pace to exceed 6.5 million square feet in 2024, which would be the highest annual total since 2019, the company said.

Still, CBRE said it may take five or 10 years of sustained demand to bring the vacancy rate in The City’s central business district — which CBRE categorizes as the core Financial District on both sides of Market Street — back from 33.9% to its 30-year average of 11%.