S.F. Tops Manhattan As Nation's Healthiest Office Market

For the first time in history, San Francisco's office rents have blown past Manhattan, recognizing the city and the Bay Area's shift toward becoming the nation's power center as more major companies establish a presence in the area. We chatted with Colliers regional executive managing director Alan Collenette
about the brokerage's new report.

Calling it San Francisco's "Glittering Age," Alan says the shift west with the growth of the tech industry marks an era, not a short-lived boom.

San Francisco is the nation's healthiest office market, Alan says. He argues the world has shifted to a knowledge-based economy that thrives on innovation, and San Francisco is its epicenter as the home to major tech firms, such as Apple, Google, Facebook, Pinterest, Twitter and more, according to the report released by Colliers.

While there has been a lot of consternation about world events and economic woes, Alan tells us the worry may be blown out of proportion. On China in particular, he says exports only account for 13% of the US economy (and China makes up less than 8% of that, or just 1% of our overall economy). China is still growing strongly (more than twice the rate of US growth) with currency that hasn't been devalued nearly as much as the currencies of other major US trading partners, he tells us. So China may import fewer products and services from the US, but will have a relatively limited direct hit on our near-term economic growth.

In addition, Alan tells us the US added an average of almost 300,000 jobs a month in Q4 and the yield curve (that harbinger of recessions) is still upward sloping (the spread between 10-year and two-year bonds is above its long-term average). Both are signs of a strong economy.

The brokerage firm's year-end office market research study found:

• Office rents higher in San Francisco ($72.26/SF) than Manhattan ($71.26/SF);
• Vacancies of 7.2% in San Francisco vs. 9.6% in Manhattan;
• Annualized rents are up 11.8% in San Francisco;
• Sublease space at 0.7% of San Francisco's 90M SF office market (compared with a high of 5.1% after the dot-com bust of 2002 and 1.6% during the recession in 2009);
• Absorption rates totaled nearly 180k SF in Q4 (total absorption for the year was 1,569,532 SF);
• Nearly 6.3M SF leased in San Francisco in 2015;
• 36 office sales transactions totaling $3.7B closed during the year (compared with 50 sales for $5B in 2014, but still above the historical averages of $2B to $3B);
• Class-A prices rose to $675/SF, compared with $615 a year ago; and
• Class-B prices rose to $573/SF from $508 a year ago.

The report notes San Francisco's 7.2% vacancy rate for Q4 included four office properties that are pre-leased but not occupied (the study only counts occupied buildings): 350 Mission St, 222 Second St, 333 Brannan St and 345 Brannan St. Those buildings are expected to be occupied in the first half of this year, dropping the vacancy back to 7% or lower.

Such growth, a strong economy, high leasing rates, pre-leasing and a robust pipeline of projects under construction mean that 2016 will remain strong for office development, the study notes. Overall, there is nearly 5M SF total under construction with 36% of it pre-leased, Alan says.