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San Francisco office tenants can breathe a momentary sigh of relief. Office vacancy rates have increased for the fourth quarter in a row, based on Cushman & Wakefield data. While rents continue to increase, they are not skyrocketing like in years past.
The vacancy rate rose to 8.7% during Q1 2017, up from 5.7% vacancy in Q1 2016. Vacancy could continue to rise, especially with 3M SF of new construction to deliver this year. At the end of Q1, only 1.3M SF was pre-leased.
Leasing activity remains strong this year and 31 large-block users are looking for 50K SF or more. About 1.5M SF of new leasing was completed last quarter. The largest deals included Slack’s lease of 225K SF at 500 Howard, Google leasing 166K SF at Rincon Center II, Adobe pre-leasing another 105K SF at 100 Hooper and Accenture pre-leasing 101K SF at Salesforce Tower.
Despite the strong leasing activity, increased vacancy, a lack of large move-ins and no pre-leased new construction deliveries kept overall net absorption in the red. It clocked in at a negative 553K SF.
Rents increased slightly from a year ago, rising to $69.66/SF in Q1 2017 versus $68.44/SF in Q1 2016. Class-A rents increased 0.7% to $74.62/SF. If any of the new space is available at Salesforce Tower, 181 Fremont or 350 Bush after delivery, Cushman & Wakefield anticipates average rent to go up since these trophy products will be priced above most of the existing, older products.
While the South Financial District had the most leasing activity last quarter with 803K SF, it also had the biggest vacancy increase of any district. It added 890K SF of direct vacancy over the last year, a 63% increase, and 400K SF was added to sublease vacancy, a 181% increase. Overall net absorption for the quarter was a negative 326K SF within the area.
About 100K SF of the vacant sublease has been leased in the South Financial District, according to Cushman & Wakefield, but new users have not taken occupancy. This vacancy could be short-lived as many tech users have expressed interest in several of the large blocks available.
