7 S.F. Trends to Watch for in 2016
While 2015 has been a banner year for the San Francisco market, things aren't cooling down any time soon. We caught up with Cushman & Wakefield senior director of research Robert Sammons, who tells us strong office space demand, a tight housing market and companies continuing to look elsewhere as San Francisco comes up against development caps will continue to be the story next year.
He gave us 7 big trends to watch in the market. Here's what you need to know.
1) Tech and non-tech will continue to expand
Robert tells us job creation will be at a slower rate, but there is still a very strong desire among companies to be part of the talent cluster that defines the San Francisco market. (That's Pinterest's planned HQ at 505 Brannan.) Right now, tenants across all industries are searching for nearly 7M SF of office space in San Francisco. Small startups will be looking to grab space with room to expand —despite San Francisco's challenges of high prices and low vacancies.
The desire for tech employees no longer applies strictly to technology companies. All industry types are competing for the same tech talent since firms, whether retail, financial services or actual software/hardware companies, have a tech component. The city's office rents still remain relatively low when compared by global firms to markets such as Hong Kong, Tokyo and London.
2) Some unicorns will become endangered or extinct
Some firms may not necessarily come to a hard stop, but there will likely be merger-and-acquisition activity that will lead to job cuts. These may either be the now less-than-rare $1B valuation unicorns or startups below that valuation threshold. Their loss could put a damper on the market temporarily.
3) S.F. costs will force companies to explore other options
San Francisco, when compared to other domestic markets, is expensive, and the transportation on which it relies to reach the rest of the Bay Area is overloaded and has not been able to keep up with the record job growth. Some companies have chosen to move back office or even front office operations elsewhere to help their bottom lines, and that includes heading across the Bay to Oakland—where they can find many of the same amenities as San Francisco at what has been a less expensive price point. (That's Uber's Uptown Station in Oakland above.)
But with that market now tight, the remaining big blocks are spread across the suburbs, where further transportation woes kick in as they aren't immediately accessible via mass transit. Some companies are giving a hard look at markets such as Denver, Salt Lake City, Portland and Phoenix.
4) The Prop M cap will limit growth
While Robert asks the question whether the mayor and board of supervisors will be able to open the cap on office space without a public vote, he answers his own question, saying it's unlikely. There are some adjustments being considered, such as putting back in the space taken out when office buildings were converted to residential, but that's a small amount. In a city planning to approve the Central SoMa plan in 2016, the cap is a sticking point. "You can't have it both ways," he says.
5) Sublease vacancy rises early, then plateaus
Some tech firms have put subleases on the market as a temporary step, reflecting they didn't grow as quickly as expected. Then there are companies like Dropbox, which is putting a big block of its China Basin headquarters (shown above) on the market as it shifts its sights to the buildings on Brannan Street it once leased for expansion space. This isn't going to be a repeat of the early 2000s where huge amounts of sublease space hit the market, but rather could be a "blessing in disguise" for tenants looking for space in a tight market.
6) Pre-leases and new development will dominate
There isn't much in the development pipeline scheduled for completion in 2016, so pre-leases at projects such as Salesforce Tower, 350 Bush, Pier 70 (above) and The Exchange will dominate the news. San Francisco will continue to play catch-up regarding residential development with new or expanded projects from Mission Rock south to the Shipyard. Also the start of construction for the new Warriors arena in Mission Bay should make headlines.
7) Fed rate hike won't affect much
The Federal Reserve's anticipated rate hike will cause minimal friction in capital markets. Plus, there's so little for sale, yet with record demand, in San Francisco's tight market that it likely will have little effect and prices will remain at record levels.