San Francisco Office Market Lands Record Number Of Large Leases In 2018
San Francisco's office market continued to perform strongly in 2018 and low supply this year is expected to keep competition robust, keep prices high and drive tenants to get more creative if they want large blocks of space.
There were 21 leases for more than 100K SF in 2018, blowing past 2017's record of 18, JLL reported in data released Monday.
Demand continues to grow, driving up rental rates, but available large blocks of new development aren't set to hit the market until 2020, which means 2019 will be a crunch year.
Big leases in Q4 included Google's 300M SF at 1 Market and Twilio's 260K SF at 101 Spear, which included space that had been previously leased by Salesforce, JLL noted. Salesforce, meanwhile, committed to leasing the 325K SF office portion of Parcel F, a proposed project that is not yet entitled.
"In today's space constrained market, tenants are employing unconventional tactics as part of their strategic real estate plans," the report said about the unusual lease approach.
More than 3.1M SF of office space delivered in San Francisco in 2018, up from 47K SF in 2017, which was down significantly from 768K SF in 2016 and 1.2M SF in 2015, JLL reports. The low number for 2017 reflects the development pipeline and construction delays that pushed some projects into 2018.
There was 4M SF under construction or renovation in 2018, with 62.8% of that pre-leased. Three big office projects set to hit the market in 2019 — 756K SF at 250 Howard St., 751K SF at 1800 Owens St. and 579K SF at the Warriors' development in Mission Bay — are 100% leased.
"With limited new available supply coming online in the next few years, market fundamentals are expected to continue to tighten," according to the report.
Vacancy fell from 8.2% in Q1 2018 to 7.1% in Q4, while average asking rates rose 9% from a year ago.
"Tenants looking for space in the city will continue to face fierce competition, forcing them to pay a premium," the report said. "Adjacent markets such as Oakland stand to benefit from the market dynamics, with increased tour activity and upward pressure on rental rates."