REAL ESTATE OUTLOOK
SAN FRANCISCO
OFFICE MARKET
THIRD QUARTER 2014
Reshaping the San Francisco skyline
Prop M concern looms among developers
With over two dozen cranes across the San Francisco skyline looming
concerns over the reinstitution of Prop M continues to keep city officials and
developers debating what future projects might be approved. This didn’t
stop net absorption which continued a strong pace in the 3Q 2014 placing
the current year-to-date number well past the 2013 year-end total thanks to
large tech tenants who continued to occupy new space. The downtown San
Francisco investment market also continued to outpace previous years and
other gateway cities nationally on volume and price per square foot. Asking
rents continued their upswing and in some cases breached the cusp of $100
PSF in selected buildings.
T RENDL INES
5- YE A R TR E ND
VAC A N C Y
7.8%
Vacancy consistently
declines
ABSORPTION
163,831 SF
ECONOM Y
Record gains
Record job growth in San Francisco market
As San Francisco continues to lead the nation in tech job growth, will these
fast growing companies be able to find the talent to fill newly leased space.
According to a recent study, San Francisco tech employment rose by 51.8%
from 2001-2012. The county of San Francisco unemployment rate was 4.7%
in August which is down from recessionary peaks at 8.9%. The county is
ranked 3rd in the state for the lowest unemployment rate, with Marin 1st
and San Mateo county 2nd.
R E N TA L R AT E
$54.93 PSF
Increase 6% from
previous quarter
UNDER CONSTRUC TION
3,406,853 SF
S U P P LY A N D D E V E L O P M E N T
Projects fill development pipeline
The reinstatement of Prop M would leave certain projects currently in the
planning stages with an uncertain future. A cap limiting the square foot total
to just 875,000 SF per year, Prop M was adopted in 1985. The proposal
governs the approval of projects above 25,000 SF and restricts the amount
of office space authorized in a year. Of the four million square feet currently
under development, over a third is preleased. This is a positive sign for
developers, and many question whether a cap should be imposed given the
robust tenant demand.
C U R R E NT Q UART E R
Construction at all
time high
P R I C E P E R S Q UA R E F O O T
$528 PSF
Prices remain high
JOB GROW TH
5.5%
Increased job growth
SAN FRANCISCO OFFICE MARKET
THIRD QUARTER 2014
DEMAND
UNEMPLOYMENT RATE
Positive absorption continues
SAN FRANCISCO
UNITED STATES
12%
9%
6%
3%
0%
09
10
11
12
13
14 YTD
SOURCE BOLS
CAP RATE
SAN FRANCISCO
UNITED STATES
9%
New construction projects coming online in 2015 should
keep overall vacancy rates in the 7% to 8% range.
The preleased space through 2016 would require 25,000 plus workers to fill it.
We expect the year to finish strong.
VAC A N C Y
Vacancy declines for the 10th consecutive quarter
7%
5%
3%
At the start of the second half of the year demand remained consistent as
tenants continued to absorb the last available large blocks of space. Google
expanded their San Francisco presence by purchasing 188 The Embarcadero for
$65 million and leasing over 225,000 SF at 1 Market Street. Both locations are
near their main office at Hills Plaza. As of 3Q 2014, net absorption has surpassed
the year-end total of 2013 at positive 1,178,892 SF.
09
10
11
12
13
14 YTD
SOURCE RCA
The vacancy rate for the San Francisco office market fell by 20 basis points in 3Q
2014 to 7.8% or approximately 5.9 million vacant square feet. Within a 12 month
period, over 1.3 million square feet has been absorbed but ironically, sublease
space has nearly doubled. Even while high profile tech tenants are taking down
large blocks of space, other firms are consolidating and relocating out of San
Francisco to avoid the high rents.
San Francisco Office Third Quarter Lease Activity
PROPERTY
TENANT
SF
1 Market Street
Google
242,640
405 Howard Street
Moody's
69,242
505 Howard Street
Perkins Cole
55,695
TYPE
SUBMARKET
Class A Direct
South Financial District
Class A Renewal
South Financial District
Class A Direct
South Financial District
San Francisco Office Third Quarter Sale Activity
PROPERTY
BUYER
SF
PRICE
PRICE PSF
50 Beale Street
Hartford Building
100 California
Paramount Group
661,324
$395,000,000
$597.00
South Financial District
Columbia Property Trust
478,000
$309,100,000
$647.00
North Financial District
Pembroke Real Estate
273,084
$182,100,000
$667.00
North Financial District
2 R E A L E S TATE OUTLOO K SAN FRA NC ISC O O FFIC E MARKET Q3 2 0 1 4
SUBMARKET
RENTS
Class A rents increase over 7%
Rental rates continued their upward trend in
the 3Q 2014 showing a 6% overall increase
compared to last quarter. Class A rents showed
the greatest movement, rising 7%. While
this is the weighted average for the market,
asking rents in some cases are approaching
$100 PSF, and not just for prime view space
in trophy buildings. Asking rents at the iconic
Ferry Building, for example, are $99.96 PSF, full
service. High priced office space is making some
companies question the economic necessity, or
viability of being located in San Francisco.
So far, most tenants are willing
to pay to stay in the “center of
the universe”.
DOWNTOWN SAN FRANCISCO NET ABSORPTION AND VACANCY THOUSAND SF
NET ABSORPTION
VACANCY
1200
18%
800
400
12%
0
-400
6%
-800
-1200
09
10
11
12
13
0%
14 YTD
SOURCE: Transwestern
DOWNTOWN SAN FRANCISCO ANNUAL ASKING RENTS
OVERALL
CLASS A
CLASS B
$60
INVESTMENT
Overseas investors place bets in San
Francisco market
Over $2.8 billion dollars and 6.3 million SF of
office investment traded in 3Q 2014. Over 62%
of the investments made in the San Francisco
market were institutional, 17% were cross
border and 7% were private. Within the last 4
years, Hong Kong has invested close to $1.1
billion dollars of capital in the San Francisco
market. HKMA a Hong Kong sovereign
wealth fund has a portfolio of across North
America and Europe with the largest in the
San Francisco Bay Area. West and East Coasts
continue to outperform other cities. Gateway
cities like San Francisco are long-established
markets with supply constraint, growth limits
and mature business communities. They
continue to attract domestic and international
capital. Both domestically and abroad, real
estate funds have needed to place capital.
That capital rush has gone to the global
gateway cities and established markets first
before trickling down to secondary and tertiary
markets. International buyers also gravitate to
these markets and view commercial real estate
as a hedge against inflation and economic
uncertainty in the home markets.
$50
$40
$30
$20
$10
$0
09
10
11
12
13
14 YTD
SOURCE: Transwestern
DOWNTOWN SAN FRANCISCO DEVELOPMENT PIPELINE THOUSAND SF
UNDER CONSTRUCTION
COMPLETED
3000
2500
2000
1500
1000
500
0
09
10
11
12
13
14 YTD
SOURCE: Transwestern
R E A L E STATE OU TL OOK SAN FR ANC I SC O OFFI C E M A R KE T Q 3 2 0 1 4 3
SAN FRANCISCO OFFICE MARKET
THIRD QUARTER 2014
Metro San Francisco Office Market Indicators
INVENTORY
UNDER
CONSTRUCTION
QTR NET
ABSORPTION
YTD NET
ABSORPTION
DIRECT
VACANCY
SUBLEASE
SPACE
TOTAL
VACANCY
AVERAGE
RATE PSF
359,799
–
–
(36,413)
8.8%
2.1%
11.0%
–
Class B
2,507,943
–
16,360
(40,804)
8.6%
1.0%
9.6%
$38.76
North Waterfront Subtotal
2,867,742
–
16,360
(77,217)
8.6%
1.1%
9.8%
$38.76
95,075
–
–
–
–
–
–
–
Class B
324,295
–
(2,048)
(2,048)
0.1%
0.6%
0.8%
$51.39
Van Ness Subtotal
419,370
–
(2,048)
(2,048)
0.1%
0.5%
0.6%
$51.39
Class A
276,479
–
2,829
(1,093)
8.7%
–
8.7%
–
Class B
1,688,711
–
2,849
12,846
6.7%
0.8%
7.5%
$47.89
Jackson Square Subtotal
1,965,190
–
5,678
11,753
7.0%
0.7%
7.7%
$47.89
Class A
21,620,793
–
20,442
75,174
7.7%
0.7%
8.4%
$52.43
Class B
9,068,600
–
33,524
66,650
6.1%
0.8%
6.8%
$49.76
30,689,393
–
53,966
141,824
7.2%
0.7%
8.0%
$50.69
Class A
18,095,004
3,288,853
(56,473)
131,482
7.3%
0.8%
8.1%
$62.82
Class B
1,811,186
–
(14,043)
212,184
10.7%
–
10.7%
$55.00
19,906,190
3,288,853
(70,516)
343,666
7.6%
0.7%
8.4%
$62.40
Class A
100,715
–
–
–
–
–
–
–
Class B
1,040,895
–
8,249
14,207
3.0%
0.1%
3.0%
$51.81
Union Square Subtotal
1,141,610
–
8,249
14,207
2.7%
0.1%
2.7%
$51.81
Class A
1,505,687
–
8,870
(3,336)
2.2%
0.5%
2.6%
–
Class B
4,210,808
–
47,969
2,596
4.0%
3.1%
7.1%
$55.00
Yerba Buena Subtotal
5,716,495
–
56,839
(740)
3.5%
2.4%
6.0%
$55.00
Class A
2,720,857
–
42,092
167,299
7.4%
–
7.4%
$54.96
Class B
1,219,325
–
(5,036)
13,880
9.1%
–
9.1%
$36.13
Civic Center Subtotal
3,940,182
–
37,056
181,179
8.0%
–
8.0%
$48.43
Class A
1,046,059
–
–
119,810
–
1.1%
1.1%
–
SUBMARKET
Class A
Class A
North Financial District Subtotal
South Financial District Subtotal
Class B
5,595,136
118,000
5,184
43,275
10.7%
0.4%
11.2%
$37.80
SOMA Subtotal
6,641,195
118,000
5,184
163,085
9.0%
0.6%
9.6%
$37.80
Class A
2,510,410
–
53,063
368,561
1.8%
0.7%
2.4%
$57.00
Class B
81,775
–
–
(2,400)
2.9%
–
2.9%
–
Mission Bay Subtotal
2,592,185
–
53,063
366,161
1.8%
0.6%
2.4%
$57.00
Class A
48,330,878
3,288,853
70,823
821,484
6.9%
0.7%
7.6%
$59.21
Class B
27,548,674
118,000
93,008
320,386
7.2%
1.0%
8.2%
$49.01
75,879,552
3,406,853
163,831
1,141,870
7.0%
0.8%
7.8%
$54.93
San Francisco Market Total
CONTACT
METHODOLOGY
Dina Simoni
Research & Marketing Manager
925.357.2023
[email protected]
The information in this report is the result of a compilation of information on office
properties located in the Bay Area. Transwestern obtained the information from a variety
of primary and secondary sources including Costar. This report includes single-tenant
and multi-tenant office properties 10,000 sq. ft. or larger, excluding office condominiums,
medical office facilities, flex and owner-occupied properties.
Four Embarcadero Center, Suite 1400
San Francisco, CA 94111
CA BROKERAGE LIC 01263636
T 415.489.1825
www.transwestern.com/sanfrancisco
Copyright © 2014 Transwestern. All rights reserved. No part of this work may be reproduced or distributed to third parties without written permission of the copyright owner. The information contained in this report was gathered by
Transwestern from CoStar and other primary and secondary sources believed to be reliable. Transwestern, however, makes no representation concerning the accuracy or completeness of such information and expressly disclaims any
responsibility for any inaccuracy contained herein.