Capital One Extends Office Pullback with Downsized Deal in Hard-Hit San Francisco
According to Pawan Naidu at CoStar News, "One of the largest financial institutions in the country is the latest company to downsize its San Francisco office footprint in the wake of the COVID-19 pandemic.
Capital One Financial is trading in its 121,000-square-foot office at 201 Third St. for an about 40,000-square-foot outpost at 100 California St., according to a statement by JLL. The brokerage represented Pembroke Real Estate, the landlord of the nearly 300,000-square-foot building in the city's Financial District.
The region saw its office vacancy rate grow from 6.9% in 2020 to 30.5% today, above San Francisco's greater market average of 22.5% and the national rate of 13.8%. The Financial District has been marred by tenants moving out of their offices in the wake of remote work trends that prompted users to reevaluate their office needs and, in some cases, leave the market all together.
The nation’s ninth largest bank occupies four floors at its current base; that office has been listed as available ahead of Capital One's lease expiration in September, according to marketing materials from JLL.
The smaller deal marks the latest retrenchment move for Capital One in and outside of San Francisco. The company leased 3.2 million square feet of corporate office space in 2023, according to reports, down 50% from 6.4 million square feet in 2017.
Other companies that have downsized in San Francisco include online review platform Yelp; the firm put its 161,000-square-foot lease at 140 New Montgomery up for sublease in 2021 as it announced a transition to a remote-first work model. In March, Glassdoor closed its remaining U.S. offices in San Francisco and Chicago, according to previous reporting by CoStar News.
Tenant Moves
In total, Capital One owned and leased 9.2 million square feet of office space in 2023, down about 30% from 12.8 million in 2018.
The company's recent lease, despite marking a nearly 70% drop in size for Capital One, serves a win for 100 California. Prior to the deal, the building was 58% vacant after Pembroke lost two tenants in 2023.
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Tailoring company Holy Stitch vacated the building after just one year and relocated to Market Street, and longtime tenant 24-Hour Fitness closed its location on the ground floor.
Capital One is now the office's second largest tenant, trailing cloud computing company Twilio that takes about 75,654 square feet.
Pembroke paid $182.25 million for 100 California in 2014. The landlord is planning upgrades for the property that includes a new conference center, a fitness facility and a new restaurant."
The trend of large companies downsizing their office spaces is becoming increasingly evident, particularly in urban hubs like San Francisco. Capital One Financial's recent move from a 121,000-square-foot office to a significantly smaller 40,000-square-foot space is a prime example of this shift. This change reflects a broader pattern influenced by the COVID-19 pandemic and the rise of remote work.
Prior to the pandemic, many large corporations maintained extensive office spaces to accommodate their operations. However, the forced shift to remote work during the pandemic has led companies to reassess their office space needs. With many employees continuing to work remotely, either full-time or part-time, the demand for large office spaces has diminished significantly. This trend is not unique to Capital One. Companies like Yelp and Glassdoor have also downsized or closed their office spaces entirely, adopting remote-first work models to adapt to the new normal.
The impact of this trend on San Francisco's Financial District is substantial. The office vacancy rate in the region has soared from 6.9% in 2020 to 30.5%, significantly higher than both the citywide average of 22.5% and the national rate of 13.8%. This surge in vacancies highlights the drastic reduction in demand for office space as companies move out or scale down their footprints.
Capital One's decision to relocate to a smaller office at 100 California St. underscores this shift. The new lease represents a nearly 70% reduction in office space for the company, aligning with its broader strategy to decrease its corporate office footprint. In 2023, Capital One leased 3.2 million square feet of corporate office space, down from 6.4 million square feet in 2017. Overall, the company owned and leased 9.2 million square feet of office space in 2023, down about 30% from 12.8 million in 2018.
This downsizing trend has had significant repercussions for landlords and property owners in commercial real estate. For instance, the building at 100 California St., where Capital One is now the second-largest tenant, was 58% vacant before the deal. Pembroke Real Estate, the landlord, has faced challenges as other tenants like Holy Stitch and 24-Hour Fitness vacated the premises. To attract and retain tenants, Pembroke is planning upgrades to the property, including a new conference center, fitness facility, and restaurant.
In conclusion, the trend of large companies moving to smaller office spaces is reshaping the commercial real estate landscape. As remote work becomes more prevalent, the demand for large office spaces continues to decline, prompting companies to downsize and property owners to innovate in order to remain competitive. Capital One's recent move is just one example of a broader trend that is likely to persist in the foreseeable future.