John Kilroy On Why 2016 Will Be A Good Year For San Francisco
San Francisco has had a run of great years and 2016 is looking to be strong, Kilroy Realty CEO John Kilroy tells us. We're excited to have John as our keynote speaker at Bisnow's San Francisco State of the Market event tomorrow at the Fairmont San Francisco, starting at 7:30am.
John tells us the fundamentals that have made San Francisco a strong market haven't changed. During the past five years, San Francisco saw greater than 1M to 2M SF in net absorption per year, John tells us, reaching an all-time record while vacancy was at an all-time low. There's good demand across the board, and anytime Kilroy Realty gets space back in its buildings, that space is leased out quickly at higher rents, he says.
While this year will likely be another good year, the volume of leasing may not be as high simply because there is less space to lease, John tells us. Kilroy's buildings south of Market have almost zero vacancy, and north of Market is at low- to mid-single-digit levels. With little inventory set to hit the market this year (and Prop M limiting how much can move through the pipeline) and San Francisco still in high demand, the forecast looks good.
One interesting switch has been the value placed on subleasing, which has historically leased for less than market rate. Now, quality space is subleasing at a premium, John says, as companies figure out how to accommodate growth.
John says there are macro forces around the world that could affect the market, from the US presidential elections to wars to China's slowdown. In tech, VC funding has moderated from its torrid pace of last year and there is worry about unicorn valuations.
Still, Kilroy Realty doesn't need to have extraordinary demand to continue to do extremely well, John tells us. There's particularly strong demand in the Bay Area, and Kilroy Realty has a number of tenants developing companies to grow in the next two to four years. That's built-in demand in a market that has very little space available.
In this past cycle, Kilroy has delivered around 1.4M SF in Bay Area projects, including Crossing/900 for Box in Redwood City. In addition, Kilroy has around 1.3M SF of projects underway in the Bay Area: Dropbox at 333 Brannan St, Salesforce at 350 Mission St, and the third, Exchange at 16th (shown above), which just broke ground in September and is in lease-up mode with a number of prospects, including one possible tenant who could lease the entire space, he tells us.
Among our other speakers will be Kilroy Realty EVP Mike Sanford (snapped at a previous event), who tells us he expects external factors (China, international conflicts, national elections) to have the greatest impact on the San Francisco market this year.
Within the city limits, the biggest thing will be approval of the Central SoMa plan, Mike predicts. For Kilroy Realty, that's particularly important, since the passage of the plan would pave the way for Kilroy's Flower Mart development.
AGI Avant CEO Eric Tao (here speaking at a previous event) offered us his broad-brushstroke forecast for this year: politically, it won't be as bad as everyone believes it will be, even with the new makeup of the San Francisco Board of Supervisors and the upcoming elections in November. However, he tells us, it won't be as good economically as everyone thinks it will be.