San Francisco's Office Market To Remain Strong This Year
This will be an interesting year for San Francisco’s office market. About 3M SF of new office is expected to be delivered later this year, bringing San Francisco’s total office inventory to 80M SF, its highest ever, according to Cushman & Wakefield.
Only 1.2M SF, or 38% of the new space, was pre-leased as of last quarter. Five potential deliveries next year could add another 1.8M SF. Of the newest space, 2.2M SF is concentrated within the city center with Salesforce Tower, 181 Fremont and 350 Bush expected by year’s end.
Cushman & Wakefield expects an optimistic outlook for the next 12 months to 24 months in San Francisco because the city remains a technology powerhouse and has strong leasing fundamentals. San Francisco metro unemployment decreased to 3% last quarter compared to the previous year's quarter of 3.3% unemployment.
The brokerage also expects asking rents to remain at or near peak levels. Asking rent increased by less than 1% last quarter to an all-time high of $69.77/SF compared to the previous quarter, while Class-A rent in the central business district decreased slightly by 0.5% to $74.13/SF.
Overall vacancy went up about 30 basis points last quarter to 8% compared to the third quarter, but rates remain lower than the 10-year average of 10.6%. Vacancy rates in the CBD, which includes North and South Financial submarkets, ticked up 80 basis points to 7.2% last quarter, Cushman & Wakefield reports.
Demand remains high despite net absorption hitting the red last quarter with a negative 335k SF, according to Cushman & Wakefield’s data. Cushman & Wakefield’s active tenants grew to 6.2M SF last quarter compared to a low of 3.6M SF in the summer.
A lack of significant move-ins and space becoming vacant pushed the fourth-quarter net absorption into the red. During the year-ago quarter, net absorption clocked in at 235k SF. For the whole year, net absorption was 561,218 SF.
Despite a slow start to leasing activity last year, the office market finished 2016 with several large leases, according to JLL data. Last quarter leasing activity totaled over 1.56M SF, which included two large renewals from Charles Schwab and Morgan Stanley. Adobe also pre-leased space at Kilroy Realty’s 100 Hooper St development and NerdWallet subleased space from Twitter.
Quality built-out space is highly sought after on both a direct and sublease basis. Landlords are upping the game with increased tenant improvements for second-generation buildings and several turnkey build-outs, according to JLL.
Sublease activity represented about 46% of lease activity for deals over 20k SF during the quarter, including NerdWallet's sublease and Gymboree subleasing space from Bare Escentuals at 71 Stevenson. Large sublease supply is declining, according to JLL, and there’s only about four 50k SF subleases left, which will help increase demand for direct space.
In total, sublease vacancy stands at about 1.5M SF or 14.5% of total available 13.2M SF office space, according to Cushman & Wakefield.