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San Francisco’s Office Sales Volume Could Surpass 2017

Investors have not let up on their interest in San Francisco office. Investment activity for 2018 is expected to surpass 2017, with many assets selling for a premium price per SF. During the third quarter, three Class-A offices totaling $573M averaged $742/SF, according to Cushman & Wakefield’s San Francisco Office Q3 2018 report.

Investment activity and capital market dynamics will be topics of discussion during Bisnow’s Bay Area Capital Markets and Real Estate Finance event Dec. 12.

San Francisco

Cushman & Wakefield expects a record-setting price per square foot set in 2018. Kilroy Realty Corp.’s purchase of the 110K SF 345 Brannan St. for $146M could be the contender for the highest price per SF sale. While not the largest purchase, it translated to $1,248/SF, which surpassed the $1,200/SF sale of Foundry III in 2017. Kilroy has already inked a deal to lease the office to Cruise Automation even before it closed escrow on the building.

By the end of Q3, more than 10 offices were being put on the market or were in talks to be put on the market, according to Cushman & Wakefield. CIM Group has put One Tehama, 274 Brannan and 260 Townsend on the market.

Office dynamics continued to strengthen this year with rents continuing to reach record-high levels of just over $81/SF for core business district Class-A direct asking rents, according to Cushman & Wakefield. Overall asking rents for all of San Francisco averaged just over $74/SF, a year-over-year increase of 6%. Vacancy also dropped 60 basis points from the previous quarter to 6.8% and is down 170 basis points from a year ago.

New offices are delivering at 100% pre-leased, pushing many companies to look at existing buildings to lease office space. Active tenants are currently searching for over 6M SF of office and large-block demand continues to outpace current supply, according to Cushman & Wakefield.

All of these dynamics have added up to a favorable investment environment with several offices trading at over $200M.

Check out some of the most noteworthy office transactions trading at over $200M below:

301 Howard St.

301 Howard St. in San Francisco

Price: $293M ($919/SF)

Size: 319K SF

Buyer: CalSTRS/DivcoWest

Seller: Vanbarton Group

Soon after the California State Teachers’ Retirement System partnered in May with DivcoWest to form a $300M venture to acquire core and core-plus commercial real estate assets, the JV completed San Francisco’s largest office buy of the year so far. Vanbarton originally bought the 23-story building for $200M ($627/SF) in January 2015, according to CoStar.

123 Mission St.

123 Mission St., San Francisco

Price: $290M ($868/SF)

Size: 346K SF

Buyer: Northwood Investors

Seller: HNA Property Holding Group of China

Increased regulatory scrutiny of several large Chinese investors has put pressure on Chinese investors, such as HNA, to sell large assets abroad. HNA originally bought the 28-story building in 2016 for $255M and sold it for a $35M profit two years later.

Ferry Building

San Francisco's Ferry Building

Price: $291M ($1,086/SF)

Size: 268K SF

Buyers: Hudson Pacific Properties and Allianz Real Estate

Seller: EQ Office, formerly Equity Office

While not the largest office sale of the year, EQ Office's sale of its stake in the Ferry Building is one of the highest prices per SF for an office in San Francisco so far this year. Hudson Pacific has a 55% share of the property and will manage day-to-day operations. The building consists of about 192K SF of Class-A office space, which is mostly leased up, and about 75K SF of retail. The new owners plan to enhance the retail, which could include increasing the days of the farmers market.

Embarcadero Square

Embarcadero Square at Embarcadero and Broadway in San Francisco

Price: $245M ($834/SF)

Size: 294K SF

Buyer: Blackstone Group

Seller: Gaw Capital

Blackstone is reportedly in talks to buy this Jackson Square/Embarcadero asset. Jackson Square and Embarcadero have had increased leasing activity in recent quarters. With asking rents high in South of Financial at close to $80/SF, Jackson Square’s $64/SF is among the lowest in Downtown San Francisco. Newcastle Partners partnered with Drake Real Estate Partners to buy a Jackson Square office in 2017. Shorenstein also bought an office in the area.

Find out more about the latest investment activity in San Francisco and the Bay Area at Bisnow’s Bay Area Capital Markets and Real Estate Finance event Dec. 12 at Hotel Nikko.