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Savills Studley Research
San Francisco
Savills Studley Report
San Francisco office sector
Q3 2014
SUMMARY
Market Highlights
AVAILABILITY AT MULTI-YEAR LOW
San Francisco’s overall vacant availability
rate fell for the sixth quarter in a row,
decreasing by 0.3 pp to 8.1%. The Class A
rate dipped by 0.6 pp to 8.2%, the lowest
vacancy rate in the last ten years. The
Class A rate in Financial District South
has declined by 3.5 pp over the last four
quarters from 10.5% to 7.0%.
QUARTERLY LEASING SLOWS
Deal volume barely reached 2.0 msf, falling
by 30.6% from the 2.9 msf leased in the
second quarter, but was still on par with the
market’s five-year average. Trailing leasing
(the sum of the four most recent quarters
of leasing) totaled 9.2 msf, exceeding the
annual average of 7.9 msf by 17.0%.
RENTS PUSH HIGHER
Asking rents continued their growth, rising
by 0.6% to $51.90 during the third quarter.
Overall asking rents have increased by 6.0%
year-on-year, with a 6.6% annual increase
in Class A buildings. Rents in the highestcaliber properties are currently running well
above $60.00.
“Leasing activity slowed and venture
capital investors have recently drawn
their horns in a bit. Nevertheless,
space options remain limited and
rents continue to rise, giving some
tenants added cause to look more
closely at East Bay and Oakland."
Colin Scanlon, Savills Studley
Research
Savills Studley Report | San Francisco
Round and Round It Goes
Office-Using Employment Trends
Millions
0.40
10.0%
0.35
8.0%
6.0%
4.0%
2009
0.30
0.25
2.0%
0.20
0.0%
0.15
-2.0%
-4.0%
0.10
SFO. Office Emp.
SFO. (% Annual Change)
2014
2013
2012
2011
2010
2008
2007
2006
0.00
-6.0%
2005
0.05
U.S. (% Annual Change)
-8.0%
-10.0%
Source: Bureau of Labor Statistics
Availability Rate Trends
Availability Rate Trends
(%)
15%
12.5%
10%
11.1%
8.2%
8.0%
5%
Class A
0%
2013 3Q
2013 4Q
Asking Rent Trends
($/sf)
$60
$50
$40
2014 1Q
2014 2Q
Class B
2014 3Q
Rental Rate Trends
$54.86
$51.47
$45.84
$44.32
$30
$20
$10
$0
02
2013 3Q
2013 4Q
2014 1Q
Class A
Class B
2014 2Q
2014 3Q
Businesses continue to conclude – despite
the rising costs of labor and real estate
– that a location in San Francisco is
indispensable if they want to capture talent
and foster innovation. Heated competition
for certain tech skills is fueling some of
the strongest wage growth in the U.S.
According to recent numbers from Robert
Half, salaries for technical employees are
expected to jump by approximately 7% to
10% and even as high as by 12% for some
employees. Demand in San Francisco is
strongest for software engineers, followed
by network administrators, help-desk
technicians, data scientists and database
developers.
Global giants such as Google and Microsoft,
as well as a swarm of start-ups, continue
to chase talent and space at a frenetic and
dizzying pace. The faster the merry-goround goes, the more people on the ride
ask how much faster it can go and when
it will stop. While landlords are bullish,
they are also mindful that the current rally
cannot last indefinitely and are doing their
best to safeguard investments via security
deposits and other collateral. Most owners
realize that they can’t simply roll the dice;
they know they must be selective in their
due diligence and hope they are picking
companies that will last for the duration of
the lease. Owners with creative-space lease
rollovers in the next nine to twelve months
are in an enviable position – assuming their
tenants have longevity.
Talent Race Continues
For now, the rally shows little sign of cooling
as more companies crave a bigger presence
in San Francisco. Bloomberg announced
that it would open an R&D office at 140
New Montgomery Street that will ultimately
employ 100 software developers. Founder
Michael Bloomberg said that “to remain
on the cutting-edge, we need to be able
to hire the most talented developers from
Silicon Valley and its surroundings.” Google
continued its San Francisco expansion,
paying $65 million for 188 Embarcadero
in July. The eight-story, 88,000-sf building
is just two blocks from Google’s current
location at Hills Plaza. Google also leased
242,640 sf at Spear Tower in One Market
Plaza. These moves, combined with
Google’s 386,000-sf expansion late last
year, push the company’s footprint in San
Francisco to more than 725,000 sf.
Bargains Limited to Periphery
Current market conditions require tenants
to either be prepared to pay top dollar or
take space in perimeter locations such as
Q3 2014
the North Waterfront, Van Ness Corridor or
Bayview. Smaller companies in the 10,000sf to 20,000-sf range, not concentrated on
core tech markets such as SOMA, can find
more traditional office space in Financial
District North, but even there concessions
have dried up and rents are rising. Tenants
with the flexibility to base all or some of
their operations in the East Bay or Peninsula
stand to capture significant savings. Some
companies are already being pushed out of
San Francisco due to spiking rental rates.
East Bay and Oakland have not attracted
the likes of Google or Bloomberg, but
deal volume has increased as a number
of smaller and mid-sized companies have
made the move across the bay. Anecdotally,
brokers have noted increased interest from
larger tenants, and a couple of developers
about to start construction on spec
properties are counting on some of these
prospective deals coming to fruition.
Mission Bay 2.0
The tech rally has already transformed
SOMA and MidMarket, the latter of which
was not even an office submarket until
recently. Mission Bay appears to be next.
The selloff of Salesforce’s land parcel is
setting the stage for a shift from a district
composed primarily of biotech and medical
users to one that is home to a greater
number of tech and creative-sector firms.
Earlier this year, the Golden State Warriors
bought a big piece for their new arena. In
the third quarter, Uber Technologies and
Alexandria Real Estate Equities teamed up
to buy one of the last pieces of the parcel,
paying $125 million for 1415 and 1515
Third Street. The site will house a 422,000sf headquarters for the rapidly expanding
car hailing app. Finally, the University of
California acquired a 3.8-acre piece, and
may build up to 500,000 sf of office or
biotech space.
Multiple Space Shortfalls
In contrast to most U.S. markets, San
Francisco does not have a demand problem
– it has a supply problem. There is never
enough skilled talent and not enough space
to house it. There are currently at least 15
tenants with space requirements of 100,000
sf or more (including JPMorgan, First
Republic and Cooley) and only six existing
buildings with a block of that size. Space
shortfalls will likely force many tenants to
renew their existing lease. If San Francisco
does not resolve its development obstacles,
a shift to the East Bay and the Central Valley
may become inevitable.
As developers buy sites and seek approval
for projects, they are concerned about
Availability Rate Comparison
Rental Rate
Comparison
Overall Rental Rate Comparison
Availability Rate Comparison
SOMA
3.4%
Union Square/Civic Center
Mission Bay/Showplace Square
Yerba Buena
Jackson Square
Financial District South
San Francisco
Rincon/South Beach
3.9%
Financial District South
4.4%
5.0%
5.9%
7.5%
8.1%
Waterfront/North Beach
9.0%
Financial District North
Financial District North
$52.01
San Francisco
$51.90
Union Square/Civic Center
$51.71
SOMA
$51.47
Jackson Square
$50.51
$39.86
Yerba Buena
14.1%
US Index
10%
$36.76
US Index
16.9%
5%
$53.74
Waterfront/North Beach
10.2%
Rincon/South Beach
(%) 0%
$57.12
15%
$32.81
Mission Bay/Showplace Square
20%
($/sf)
$29.32
$0
$10
$20
$30
$40
$50
$60
Major Transactions
Tenant
Sq Feet
Address
Market Area
Google
242,640
1 Market St
Financial District South
Citrix Systems
83,541
505 Howard St
Financial District South
Moody's KMV
69,242
405 Howard St
Financial District South
Perkins Coie
55,695
505 Howard St
Financial District South
Prosper Marketplace
47,905
221 Main St
Financial District South
Next15
46,791
100 Montgomery St
Financial District North
NerdWallet
45,739
901 Market St
Yerba Buena
Lighthouse for the Blind
39,332
1155 Market St
SOMA
Google
36,851
188 Embarcadero
Financial District South
TY Lin
30,159
345 California St
Financial District North
a potential major stumbling block –
Proposition M. This proposition, voted in
during 1986, caps the amount of office
development that can be approved in
San Francisco at 950,000 sf per year –
unused rights roll over to the next year.
The Uber/Alexandria parcel was one of
the last sites with automatic Proposition M
approvals. Currently, about 2.0 msf of office
development capacity is under the cap,
well short of the 11.0 msf of office space in
pre-approval stages. Developers have been
scrambling to submit proposals before the
gates go up but the issue may be coming
to a head. News that a key deal on property
taxes and special assessments at Transbay
Terminal fell apart as the quarter was ending
has caused developers to threaten to halt
construction.
Just as tech and creative-sector tenants
are willing to bear the costs of staffing and
leasing in San Francisco, many institutional
and foreign investors are still willing to pay
the price for assets. Buildings continue to
sell for more than $600 psf. Paramount
further expanded its portfolio in the third
quarter, adding 50 Beale Street for $395
million ($596 psf). Columbia Property Trust,
which already owns 221 Main Street and
333 Market Street, paid $309 million ($646
psf) for 650 California Street. The 33-story,
178,000-sf property was 88% occupied at
time of sale.
Looking Forward
Deal volume is likely to taper off for the
balance of 2014. A handful of tenants are
in the market for larger blocks, but the
frenzied search for big blocks is stymied by
the lack of options. New construction could
generate some additional momentum, but
the standoff between developers and the
city regarding zoning and taxes, particularly
in the Transbay district, may bear more
watching than the leasing market. If this
standoff is not resolved, the merry-go-round
could experience a sharp, abrupt stop.
savills-studley.com/research
03
Savills Studley Report | San Francisco
Map
Submarket
Total
Leasing
Activity
Available
SF
Availability
Rate
Asking Rents
Per SF
SF
(1000's)
Last
12 Months
This
Quarter
%
Change
from
Last Qtr.
Year
Ago
This
Quarter
pp
Change
from
Last Qtr. (1)
Year
Ago
This
Quarter
%
Change
from
Last Qtr.
Year
Ago
1
Financial District North
Financial District North - Class A
30,155
21,343
2,296
1,712
3,072
2,106
-3.9%
-13.6%
2,988
2,185
10.2%
9.9%
-0.4%
-1.6%
10.2%
10.7%
$52.01
$53.56
-2.0%
-1.5%
$50.15
$51.04
2
Financial District South
Financial District South - Class A
23,700
19,252
3,336
2,957
1,786
1,339
-12.7%
-11.7%
2,712
2,015
7.5%
7.0%
-1.1%
-0.9%
11.5%
10.5%
$53.74
$54.98
0.9%
1.3%
$51.66
$53.21
3
Rincon/South Beach
Rincon/South Beach - Class A
4,266
1,544
719
460
603
347
43.2%
24.7%
292
109
14.1%
22.4%
4.3%
4.5%
7.0%
7.1%
$57.12
$64.24
0.3%
3.2%
$46.09
$46.41
4
Yerba Buena
Yerba Buena - Class A
3,320
730
660
249
164
3
-37.6%
0.0%
598
255
5.0%
0.5%
-3.0%
0.0%
17.9%
36.9%
$36.76
$50.00
-1.0%
0.0%
$39.61
$42.06
5
SOMA
SOMA - Class A
4,475
1,845
795
N/A
154
26
-14.1%
18.6%
848
226
3.4%
1.4%
-0.6%
0.2%
18.2%
12.2%
$51.47
N/A
13.4%
N/A
$43.81
N/A
6
Union Square/Civic Center
Union Square/Civic Center - Class A
4,999
503
303
30
197
12
14.2%
-13.3%
781
10
3.9%
2.3%
0.5%
-0.4%
15.9%
2.0%
$51.71
N/A
1.3%
N/A
$41.03
$46.05
7
Jackson Square
Jackson Square - Class A
2,085
414
319
46
122
N/A
-34.0%
N/A
237
N/A
5.9%
N/A
-3.0%
N/A
12.1%
N/A
$50.51
N/A
7.4%
N/A
$51.11
N/A
Waterfront/North Beach
Waterfront/North Beach - Class A
Mission Bay/Showplace Square
Mission Bay/Showplace Square - Class A
3,455
859
4,947
2,688
132
19
661
375
310
109
220
91
19.8%
113.0%
15.7%
243.8%
294
42
603
399
9.0%
12.7%
4.4%
3.4%
1.5%
6.7%
0.6%
2.4%
8.0%
4.6%
12.7%
18.6%
$39.86
N/A
$29.32
$55.00
0.5%
N/A
-6.7%
0.0%
$38.21
$38.28
$51.56
$55.00
San Francisco Total
San Francisco Total - Class A
81,401
49,179
9,223
6,027
6,628
4,036
-4.1%
-7.3%
9,354
5,288
8.1%
8.2%
-0.3%
-0.6%
11.6%
11.1%
$51.90
$54.86
0.6%
0.8%
$48.95
$51.47
8
9
1-9
Please contact us for further information
Savills Studley
150 California Street
14th Floor
San Francisco, CA 94111
(415) 421-5900
Bay St
Co
lum
Branch Manager
Steve Barker - Executive Vice President
[email protected]
8
sA
ve
7
a St
Californi
Bush St
6
M
(1) Percentage point change for availability rates.
Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf.
Statistics are calculated using both direct and sublease information.
Short-term sublet spaces (terms under two years) were excluded.
bu
a
e
rk
tS
t
1
4
7t
h
St
5
4t
2
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wn
To
16th St
nd
St
9
3rd St
The information in this report is obtained from sources deemed reliable, but no representation
is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group.
Copyright © 2014 Savills Studley
04
3
St
www.savills-studley.com
@SavillsStudley