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What To Expect In San Francisco's Office Market In 2017

2016 was a year of volatility and adjustments for San Francisco’s commercial real estate market. Many industry experts expect more rational pricing next year, but still plenty of opportunities. We spoke with two experts on commercial real estate to get their takes on what we can expect heading into next year.

What To Expect In San Francisco's Office Market In 2017

“San Francisco’s commercial real estate sector in 2016 was marked by volatility, contradictions and uncertainty,” said Cushman & Wakefield managing principal, San Francisco JD Lumpkin (above). “The world changed a lot in January and February as people took pause on the expectation the market was headed for a correction. The days of pure momentum play have subsided.”

Lumpkin said while he doesn’t expect rents to go down, rent growth will be relatively flat. Pricing will feel full, but be sustainable.

“My advice to tenants is to pay attention to your own business plan and what you need to be successful,” Lumpkin said. “There is not a lot of consistency in the market, but opportunities for quality sublease space and upgrading your workplace environment in newly built space exist.”

Lumpkin said blocks of large space should continue to demand a premium, but landlords are offering more tenant improvement packages and concessions.

He said midsized second-generation commodity space remains a challenge to move, but individual value-add assets with immediate lease roll receive attention from investors. Tech will continue to drive net new demand, but M&A activity may create more volatility, he said.

What To Expect In San Francisco's Office Market In 2017

Allen Matkins partner Tony Natsis (above with his daughter, Marialexa, and his wife, Demetra), who will moderate a panel at our upcoming San Francisco State of the Market event, said the fundamentals of San Francisco’s market are still strong.

“We don’t have a drop in rental rates, we don’t have a drop in investment sales pricing, we don’t have a decrease in cap rates and there is still permanent debt available,” Natsis said.

He said people are starting to get a little apprehensive, but that’s not based on actual data. It has more to do with people not wanting to be “the last person standing when the music goes off.”

Investors who got into the market from 2011 to 2015 have done well with their investments, Lumpkin said. Space has moved rapidly and tenants didn’t feel like they were paying the highest rents. 2016 has been a year of adjustment for the industry with volatility being the new normal, according to Lumpkin.

“Tenants and landlords have become more accustomed to, or comfortable with, these familiar feelings of uncertainty,” Lumpkin said. “They are no longer sitting on the sidelines in a ‘watch-and-see’ mode, but executing their business plans and moving forward.”

San Francisco skyline
credit: Tony Webster

Natsis said the “smarter, shrewder people are still active.” Commercial real estate firms are still buying land to get ready for the next cycle. Early in the current cycle, people who were a little cautious in the beginning had a late start and have since learned their lessons.

Natsis fully expects deals to come out early next year since many firms likely took a wait-and-see approach with the election and didn’t want to put a property on the market leading into the end of the year.

The San Francisco Bay Area will still be a desirable place for all age groups from Millennials to Baby Boomers to live, Natsis said. San Francisco and Silicon Valley also make up the two largest tech markets (or one giant market) and that’s not going to change any time soon.

Join Bisnow in San Francisco on Jan. 18 to find out more about what to expect in 2017.