O
ffice rents in the San Francisco metro area are being driven up by high prices along Sand Hill Road in Menlo Park, according to data from CommercialEdge. This has led to the entire region's average rent increasing, making it the most expensive office market in the country, surpassing New York City. However, this is largely due to the inclusion of hot suburban markets on the Peninsula, explained Peter Kolaczynski, associate director of commercial real estate software company Yardi.

    Kolaczynski noted that asking rents are not always a reliable indicator of a market's health, as concessions have become more common and brokers often remove asking rates from listings. Despite this, top submarkets in San Francisco have average asking rents under $60 per square foot, while Silicon Valley averages around $90 and Menlo Park exceeds $100.

    Sand Hill Commons on Sand Hill Road had the highest office listing nationwide this fall, with an average asking rent of $204 per square foot. The suburban success versus urban struggle continues to be a narrative for the SF area, Kolaczynski said.

    The pandemic has benefited markets like Menlo Park, which was once known as "Menlo Dark" due to its sleepy reputation. Kabir Seth, COO of Presidio Bay Ventures, attributes this to an increase in satellite offices and amenities catering to those living and working on the Peninsula. Sand Hill Road remains a hub for venture capital firms, and tech companies are willing to pay high rents to be close to these firms and Stanford and Berkeley talent.

    High rents have led to high sales prices, with the San Francisco metro average reaching $392 per square foot in October, the highest in the country. Average sale prices were around $274 per square foot in San Francisco's CBD, $331 per square foot in broader urban markets, and $471 per square foot in suburban markets.

    As pandemic memories fade, companies are realizing that younger employees want to be near denser, urban environments that meet their personal social and cultural needs. This has led some AI companies to establish headquarters in San Francisco proper, giving the city an advantage over suburban campuses. However, this doesn't mean any old space will do; offices need to cater to tenants' needs through investments in features like collaborative workspaces, health and wellness amenities, and proactive building management.

    Even prized locations along Sand Hill Road will need to step up their game, as aging office stock on the Peninsula requires significant upgrades. Newer locations with holistic offerings are attracting tenants who no longer see Sand Hill Road as the only option.