San Francisco Office Rent and Abosorption

For the first time since 2010, the average asking rent for Class A office space in San Francisco’s Central Business District has declined versus the quarter before, slipping 0.9 percent to $70.64 per square foot in the first quarter of the year.

That being said, including Class B space, the overall asking rent for office space across San Francisco did hit a record $68.44 per square foot in the first quarter, up $0.30 per square foot (0.4 percent) from the end of last year, according to data from Cushman & Wakefield.

At the same time, new leasing activity in the first quarter of 2016 totaled 1.1 million square feet versus 2.2 million square feet in the first quarter of 2015, and “active tenant requirements” fell from 5.2 million square feet in the fourth quarter of 2015 to 4.6 million square feet today, down from 6.5 million square feet at the same time last year.

And in terms of supply, there is 4.3 million square feet of vacant office space in the city (822,000 square feet of which is leased but available for sublet, up from 730,000 feet in the fourth quarter), and 4.4 million square feet of space under construction (half of which is currently pre-leased).

The vacancy rate for office space in San Francisco is currently 5.7 percent, which is down 20 basis points from the end of last year but expected to start ticking up and versus a long-term average of 9.4 percent.

Comments from Plugged-In Readers

  1. Posted by Tony

    That seems like a high vacancy rate. Shouldn’t that put downward pressure on the price?

    [Editor’s Note: No. The current vacancy rate is not only historically low (see rate above) but lower than the quarter before (see above) and 70 basis points lower than at the same time last year.]

  2. Posted by Dave

    Does the 4.4 million under construction include the 1 million square feet in the First/Mission tower? Technically that is not under construction – it won’t break ground until November.

    [Editor’s Note: No. A building that’s “not under construction” is not included in the “under construction” count.]

    • Posted by Orland

      “- won’t break ground until November. ”

      And maybe not then according to today’s Chron.

      • Posted by Dave

        I can’t find the article. What is the reason for a potential delay in ground breaking?

        The just released GDP numbers show a very anemic .5% growth last quarter. Those numbers will be revised and likely down – given this is an election year. Talk of a recession is out there.

        Were the reasons economic for any delay in starting construction?

        • Posted by Orland

          A very long, detailed and interesting article about shadowing effect the Foster-designed tower will have on most of the major parks Downtown subject to prop. K. Bill Maher! Talk about a name from the past.

          I sense litigation coming on. Do private parties have a cause of action? Standing?

          • Posted by Dave

            From the article it sounds like some think the First/Mission tower will violate Prop K. Apparently the PC disagreed as they approved it.

            Given that disagreement, and I don’t know which side is right on this, I’d think San Franciscans would have standing to bring a lawsuit to settle the issue and adjudicate accordingly. SF voters approved the shadow ordinance after.

            If a lawsuit were to happen in the name of San Francisco voters it might be considered a public party as opposed to a private one? If any lawyer is out there maybe they can clarify this.

            Didn’t the Salesforce tower have its height scaled back significantly because of shadow issues?

          • Posted by Orland

            I frankly don’t know if the civil courts would have any jurisdiction over a claim to purportedly “enfore” prop K beyond the administrative remedies before Planning, Rec Park, Board of Appeals, etc.

            Like so much straight-jacketed and arbitrary legislation, K was a disaster in the making from inception. In another recent thread here, “Jim” raised some very cogent questions as to the level of sophistication of its criteria to take into consideration of the actual effect of a “shadow” given radiation of ambient light at a distance. Although I agree the parks and open spaces involved here are key, I find it difficult to believe much real harm would be done to their enjoyment. Moreover, the monetary concessions exacted IMO more than mitigate the effects. The quote by Maher is asinine.

            It’s my understanding that the TTC tower (now Salesforce) was originally proposed at 1200′ but will actually be built at around 1080. I’m not sure why it was scaled back.

            [Editor’s Note: Transbay Land Cost Cut Another $50 Million For Shrunken Tower.]

          • Posted by orland

            A lot of material there what with all the interlinks. However, I still couldn’t tell just why the height was reduced other than the ultimate purchase price paid by the Pelli-lead team reflected the fact that the usable square footage reflected that the tower was “shaved.”

            One result of reviewing that dated material was reinforcement that the SOM design was vastly superior to that now rising at TTC. Really the potential for one of the most beautiful buildings since 1960.

            Have they extrapolated it for use at some lucky elsewhere? I keep harboring hope that it might yet find a home here. 181 Fremont or 50 1st would have been likely candidates. How about at parcel F opposite Salesforce? Would be fitting that it prove to be the upstart to its bigger brother.

          • Posted by [skyscraperluvr]

            What the heck is “TTC?”

            [Editor’s Note: We’re guessing Transbay Transit Center.]

          • Posted by Orland

            That’s what I’ve always taken it for the many times I’ve seen it used here.

  3. Posted by Dave

    These numbers look “neutral” but for the 50% drop in leasing activity compared to the first quarter of 2015.

    Beyond that, it’d be interesting to see if the mix of leasing is changing – larger clients taking multiple floors vs small “boutique” lessees such as law firms and advertising agencies. If it is shifting to smaller leases that would not be a good sign IMO.

  4. Posted by Sierrajeff

    Confusing chart. (C&W’s fault, not SS) I initially missed the legend at the bottom, only read the two vertical axes, and thought rents had plummeted from $75 psf to $20 psf in the last year!

    • Posted by Just My Opinion

      There is nothing confusing about the chart at all.

      • Posted by Sierrajeff

        You’re right, I’m an inbred moron with no business going out in public; your impressions are, as usual, fully correct and paramount.

  5. Posted by Just My Opinion

    And very sensitive apparently. My apologies.

  6. Posted by Dave

    Of the already leased space coming online this year SalesForce and LinkedIn seem to have taken half.

    How many huge leases like these will follow? Both are local companies and I assume a good portion of the space they are taking will be used to relocate workers from existing SF office space. Putting that space on the secondary market.

    2.2 million square feet is soon to come online. I wonder if developers of office space in SF can count on mega-leases such as these in the coming few years? Given there is no news of significant job relocations to SF or expansions w/in SF.

    The office market will be interesting to follow going forward.

    • Posted by Sabbie

      Consider that LinkedIn makes most of its money through job recruiting. And what is the first thing to go when the economy slows down? Bingo.

      • Posted by Dave

        Yes. Plus SF is not really a diversified economy. it is a service economy with health care and government jobs concentrations. The spillover from SV has pushed some tech jobs here but they are still less than 10% (I believe) of SF jobs. Yet the office building boom has been predicated on tech jobs to a big degree. Salesforce and LinkedIn and Uber.

        As tech slows in the SV it will slow more here as local retrenchment will to to the SV IMO.

        Schwab moved a huge chunk of workers out last year. leaving their Fremont Street building with a lot of space to lease out.

        HP Lennar’s multi-million square feet of office space is not readily finding takers. So a huge chunk may be leased to a private academy. The saving grace for Lennar is that its project is spaced out over years and they can build/not build at a particular point in response to the economy.

        On a positive note, if office building and plans slow significantly that will IMO be good for SF as realistically, IMO, the City can’t absorb huge amounts of new jobs. Given the infrastructure and the ongoing failure to address infrastructure issues.

        • Posted by SFRealist

          What is our unemployment rate? 3 or 4%? I don’t think we’d have too much trouble filling space.

          [Editor’s Note: San Francisco and East Bay Employment Slip]

          • Posted by Sabbie

            What I’m talking about is how quickly that unemployment rate can change. In one year, from May 2008 to May 2009, the unemployment rate in the SF Bay Area went from 4.7% to 8.4%. And that was neither a locally centered or tech based bubble, this one is both. Speaking of which, new article today in the WSJ today “This Tech Bubble is Bursting”

          • Posted by anon

            “Last year, 2015, was the year of the unicorn, a startup that raised so much venture investment, it was valued at $1 billion or more.

            But 2016 has become the year of the “unicorpse.”

            Many unprofitable, once high-flying startups are having their come-to-Jesus moments: they may have problematic products, can’t easily raise more VC money, no one wants to buy them, and no one is interested in their IPOs.”

            Unicorpse, why didn’t I think of that.

          • Posted by Jake

            There is no new info in that WSJ article, just some quotes from a VC and rehash of stuff well known or been published elsewhere. Over the past couple years tech financing has gotten tougher for IPO and pre-IPO rounds. Investors are being smarter, which has taken some of the air out of the 2012-4 IPO gusts.
            The local tech employment level is driven by jobs that depend on the financial performance of the big public companies and jobs that depend on the financial promise of the big non-public companies. There’s less coupling between the two now than back in the dotcom, when Sun, Oracle, Cisco, etc got a big share of revenue from VC backed companies.
            FWIW, a startup I work with has outgrown the shared-office-tenements and is looking for office space. Would be in SF near BART for the right price, else Oaklandia near BART. SF CBD office rents are ~25% below the dotcom peak inflation adjusted, but maybe still 20-30% higher than would right price them enough to crush Oakland/EB alternatives.
            Now, if Uber decides to live within their current space means and puts their MB land on sale and folds their Oakland plans…..And Airbnb, and ….

          • Posted by anon

            “Precisely when current weakness in the system forces a correction even sharper than what we’ve already seen is impossible to predict, because it is about mass psychology as much as it is the financial system.”

            This is the key here. Frothy behavior and bubble occur when expectations drive valuation much higher than facts would normally support. Everyone already knows that these companies are losing money and lack a business model. But previously no one really seemed to care. The key to watch for is a change in expectations.

            The fact that this article was written and carried in the WSJ is a data point of changing expectations.

            A few days ago when Sabbie first posted the Bill Gurley blog post, some here dismissed it as just “something written on the internet”, displaying their profound ignorance of who Mr Gurley is and the heckler’s lack of knowledge of the technology industry. The fact that Mr. Gurley’s post is ricocheting around the valley is news in and of itself.

          • Posted by EBGuy

            @Jake, The Unicorpse article was from BI. For some hard hitting journalism, this piece from the WSJ on the ping pong index is a must read. YMMV.

  7. Posted by Sabbie

    If you think those entities are decoupled, here’s an example of how they’re not: Amazon Dot Con http://investmentresearchdynamics.com/amazon-dot-con/

    And you may not be worried about CRE, but the lenders seem to be: “US banks sound caution on commercial property loans” https://next.ft.com/content/7860295c-08c0-11e6-a623-b84d06a39ec2

  8. Posted by Jake

    “Less coupling” not “decoupled”. Come on folks, I know you can read. And yes there is much much less coupling than in the dotcom era.

    As for AWS, they are a minor part of AMZN revenue. They also dominate the market because they are very good at what they do. That article tries to make a big deal out of things like AWS “prices have dropped 90%+ in 3 years.” Ever hear of Moore’s Law? Guess what kind of decline you would expect in 3 years? ~90%. Yet AWS has increasing revenue while making a profit at a nicer margin than the core AMZN business.

    Cloud providers are replacing the self-hosted business IT as much as they are competing with each other. They mostly charge similar low prices anyway. They are a danger to the mainframe and enterprise tech providers because they achieve even greater scale, performance, and reliability with commodity hw and pricing.

    And BTW, that article also claims cloud computing is like the fiber optic business. I’ve been a customer of both and provider of one. They are very different. If only one fiber provider goes where you need, then they are a monopoly and can charge outrageous fees, until another fiber provider or two lays a line to compete and then they are a commodity and prices plunge because it is very easy to switch and the new provider needs to fill their fiber.

    By contrast, just try moving your entire sw stack and petabytes of data from AWS to google/azure/etc while running your business. Doable, but a huge pain, write-off large learning investment, plus egress fees. And they are already priced like a commodity anyway, so there is very little to be gained. Sticky business, very.

    I would be delighted to see commercial property prices in SF and the Bay Area drop ~20%. Rent is too damn high and would welcome a slow down in CRE building to a pace in line with the growth of the transport infrastructure.

    I agree with most of what Bill Gurley wrote, but if you are getting your clues from what he is willing to publish, then you will always be months or years behind the knowledge curve.

  9. Posted by Stop Driving

    2008 all over again. Save your pennies and buy what you can in 2 years when the market his its ‘bottom.’ Sell again 7 years from now when the market hits a new peak. If enough housing remains in the pipeline, you might (might) see some cheap residential listings in a couple years. Maybe.

    • Posted by Dave

      I believe there are a little over 7K units actually under construction and set to come online in the next two years.

      But beyond that, anything can change – as to plans. 11K units are permitted but not set for construction. Those could easily be put on hold.

      The vast buld of the 62K units in the pipeline are years and years away and may not come to fruition. Or they may.

      However, if things turn down, if there is another recession – look for the supply spicket/pipeline to shut off quickly.

      • Posted by anon

        “However, if things turn down, if there is another recession – look for the supply spicket/pipeline to shut off quickly.”

        It depends if you’re betting on Armageddon or just a bubble bursting. If investors bought into land or a construction project at a high valuation based on absurd expectations, those particular investors might get wiped out, but the project might still pencil out to new investors who take over at a lower valuation.

        There was life before the bubble. And if housing prices fall so low that new construction is uneconomical even at post burst valuations, that would be quite an extreme outcome.

        • Posted by Dave

          I am not calling for Armageddon at all.

          I think there will be a modest decrease in prices followed by an adjustment in appreciation here vs the rest of the country. I expect the Bay Area will return to more normal gains in housing prices versus other metros. I expect it to remain more expensive than other metro areas for the foreseeable future, but the disparity between here and other markets to shrink. Which would be a healthy thing for the Bay Area IMO..

          Tech jobs are going to be less concentrated in the Bay Area (IMO) over time which will help the trend towards more historic/reasonable price gains. Personally I know quite a few young techies who have packed their bags and relocated this past year – out of the region.

          The 62K pipeline is based on assumptions for decades to come. SF going to a million residents. I don’t think that is a given and it too will be a factor as to what gets built by 2030 or whenever.

          Some projects can still pencil out if offered at a lower price to new investors. I was involved in one of those in the last downturn.

          How many of these projects are based on a premise of 5/6/7% appreciation per year I don’t know. The Sutro project was put up for sale by the original developer/investors after fully entitled. It has seen a big offering price cut I believe. So yes, it will depend on the particular project and the state of the local economy..

  10. Posted by Lori

    Large companies like the one I work for are assessing their real estate costs as I type. They are looking to reduce office space for workers. More and more jobs will go 100% remote, or only require part-time space.

  11. Posted by Mark F.

    My firm has reduced its San Francisco office space the past 5 years by over 25%. And we are doing fine.

  12. Posted by Michael

    Prosper cutting 30% of its staff, including 14% of its San Francisco and Phoenix-based workforce focused on marketing, human resources, business development and engineering.

    “A new office space that was earmarked for expansion instead will be subleased, the company said.”

    The third and fourth floors at 201 Spear?

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