Vacancy Decreases to 2.7%; Rents Up 3.5%
Net absorption positive 359,380 SF in first quarter
click here to download the Q1 Report: Calco Q1 Market Report 2016
Vacancy Decreases to 2.7%; Rents Up 3.5%
Net absorption positive 359,380 SF in first quarter
click here to download the Q1 Report: Calco Q1 Market Report 2016
Source: San Francisco Business Times
By: Roland Li
Date Posted: May 2, 2016
Boston Properties, San Francisco’s largest office landlord, thinks the country’s hottest office market is cooling.
In an earnings call last week, Doug Linde, president of Boston Properties (NYSE: BXP), said that San Francisco’s office market is seeing fewer space needs from larger tenants, which could indicate a slowdown, while Silicon Valley’s activity is growing.
“I think the big difference between the market then — i.e. in 2014 and 2015 — and today is really the lack of large growth requirements, and by that I mean big tenants over 300,000 square feet,” said Linde, according to a transcript.
Boston Properties, which had 5.8 million square feet of office space in the Bay Area market at 93.8 percent occupancy as of December 2015, is working on some of the largest office projects in the city. Along with minority partner Hines, Boston is building Salesforce Tower, which will be the tallest tower in the city when it opens next spring. Still, Linde cited some pullback.
“San Francisco has slowed from the pace that it was going at in 2014 and 2015. Silicon Valley continues to be very active and actually has been expanding,” he said. There’s a dearth of huge tenants such as Salesforce.com, Stripe and LinkedIn, who all signed huge leases over the past three years, he added.
“So technology is still a vibrant part of the market, it’s still expanding, it’s not quite in the same manner that it was in 2014 and 2015,” said Linde.
Linde’s perspective mirrors the consensus of many real estate brokerages, who have projected a slowdown this year after record leasing activity in the past few years. However, the majority of first quarter reports anticipates that San Francisco will remain one of the country’s most expensive markets. Asking rents are over $70 per square foot, and vacancy is hovering around 5 percent for Class A space.
But some real estate professionals fear that a full downturn could occur. They see a tech bubble, citing startups with unsustainable business models that are committing to huge blocks of space that they likely won’t fill.
Boston Properties, though, says its developments are filling up. Salesforce Tower is now 59 percent occupied, said Linde on the earnings call, and the landlord is in talks with both single-floor and multi-floor tenants. He said that by the end of the second quarter, the company hopes to complete another 100,000 square feet in leases.
In the past quarter, Bain & Co. and Vy Capital have signed leases at Salesforce Tower, underscoring continued demand from non-tech tenants. CBRE Group Inc., the tower’s own broker, is also close to a lease. Boston Properties also completed 535 Mission St. in 2014 and is seeking approvals for a 1.1 million-square-foot project at Fourth and Harrison streets in the Central SoMa district.
However, Boston Properties has also shown caution. Michael Tymoff, Boston Properties’ senior project manager, development, told the Business Times in February that the company has declined to pursue projects because expected returns didn’t match land or construction pricing.
“We are very disciplined, both in our timing and the selectivity of sites,” he said. “While we evaluate every project on its own merits, we currently target 7 percent returns or better for our ground-up office developments.” Tymoff didn’t immediately respond to requests for additional comment on Monday.
Brokerage data also indicates that Linde’s comments on tenant demand may be inaccurate. JLL is tracking over 9.3 million square feet of current demand in San Francisco, including three tenants with requirements over 500,000 square feet.
Brokers have said that Google Inc. (NASDAQ: GOOG), as well as health care and financial services firms are seeking large blocks of space over 300,000 square feet. Amazon.com Inc. (NASDAQ:AMZN)’s Twitch and cloud-computing company Okta, and co-working firm WeWork are also looking for spaces larger than 100,000 square feet, according to multiple sources.
The slowdown this year is in part because the last three years have seen record activity, and the pipeline of new projects, including Salesforce Tower, have rents as high as the triple digits.
“A lot of the growth has already occurred,” said Amber Schiada, director of research for Northern California at brokerage JLL. “If you’re a big company like that, you’re not eager to take on $80 rents or $100 rents.”
There’s also more scrutiny for rising costs. “VCs are really pulling back on expansion on their younger companies, trying to minimize burn rates,” said Schiada, referring to venture capitalists.
New towers in the Transbay district including 181 Fremont St. and Park Tower have signed no tenants, but those buildings also won’t be delivered until late next year or later, said Schiada. Tenants are showing a preference for pre-built space that is ready for occupancy, she said.
Another big public landlord, Kilroy Realty Corp. ( NYSE: KRC), stated last week during its earnings call that San Francisco remained strong, and sublease space was being filled up.
Mike Sanford, Kilroy’s executive vice president of Northern California, said that the company was still seeing strong demand. “Down on the street there’s just more activity, more tenants coming to the buildings, looking for space and then boots on the ground,” said Sanford.
Link to article: Office Slowdown
Most Markets Continue to Enjoy Steady Growth in Demand and Rental Rates, Although Rate of Increases Beginning to Moderate
Source: CoStar News
By: Randyl Drummer
Date Posted: April 21, 2016
The U.S. office market appears to be at the stage in the real estate cycle that analysts often describe as a turning point or tipping point. Overall, the U.S. office market continued to post solid fundamentals during the first quarter, including very strong net absorption, while traces of a slowdown in demand appeared in some markets.
“We are seeing mixed signals in the marketplace, although our expectation is the office market will continue to do fairly well for the next few years,” said CoStar Director of Office Research Walter Page, who presented the First Quarter 2016 State of the U.S. Office Market Review and Forecast findings to CoStar subscribers this week. “The biggest mixed signals are really related to net absorption and sales volumes.”
Total net absorption of 11 million square feet of office space in the first quarter was about the same as first-quarter 2015, a leveling off from the upward trend of recent quarters. On the other hand, net space taken by occupiers over the past four quarters exceeds the similar trailing period ending in 2015’s first quarter by nearly 11% at 98 million square feet, noted Page, who presented the findings this week, along with Hans Nordby, managing director of CoStar Portfolio Strategy, and Aaron Jodka, senior manager, Market Analytics.
“All in all, it’s still a very good picture, but the market is clearly not growing as rapidly as before,” added Page. “Our expectation is that going forward, we’re going to see a continuing decline in net absorption, principally because we’re headed for that demographic cliff of retiring baby boomers.”
Office-using employment, a key metric for office demand, continued to outperform the broader job market, especially in the nation’s tech markets, as well as South Florida, Dallas and other pockets of growth and recovery from the housing bust following the Great Recession. Conditions for office job growth should remain strong for the next two years before gradually slowing through 2020, Nordby said.
Despite signs of slowing, solid absorption and occupancy levels continue to be enabled by the moderate pace of new office construction and deliveries in most markets. The 127 million square feet of office space under construction in the first quarter was up only slightly from the same period last year.
Link to article: Office Market Mixed Signals
Source: Bloomberg
By: Rani Molla, Shira Ovide
Date Posted: April 18, 2016
The Bay Area has long been the center of the technology world, and it remains the undisputed king of startups. But lower wattage tech hubs are popping up as hospitable homes for the next Facebook or Google.
The bloom of more silicon cities has spread tech jobs into some unlikely places such as Florida and Utah, but it has also brought some of the attendant annoyances familiar to Northern California, including rising costs for office space.
U.S. venture capital firms — the financiers seeking to find and fund the next Google or Facebook — wrote $12.1 billion worth of checks for U.S. startups in the first quarter of 2016, according to a PwC and NVCA MoneyTree report based on data from Thomson Reuters. About 40 percent of that sum went to young companies in the Bay Area, a share of startup financing that has increased from a decade ago.
But some of the biggest deals in the first quarter of 2016 went to companies outside of the Bay Area. Magic Leap — a Dania, Fla., startup that is working on technology to mix virtual images with the real world — collected $794 million from investors. Domo, a business software startup based in American Fork, Utah, added $131 million to its coffers so far this year, and it is laying the groundwork for an initial public offering.
The spread of startup money outside the Bay Area has helped those cities take advantage of growth in high-tech jobs, which has far outpaced that of office jobs overall.
And while Silicon Valley continues to lead the pack, Phoenix, Austin, Nashville, Indianapolis, Charlotte and Salt Lake City all made the top 10 list for growth in high-tech jobs, according to the latest available citywide data from real estate services firm CBRE, which analyzed U.S. Bureau of Labor Statistics data.
The trend of startup money and jobs flowing beyond the Bay Area is no accident. Startup founders say pay for employees in other tech hubs such as Seattle, Salt Lake City and Birmingham, Ala., tends to be lower than it is in the Bay Area. Startup workers outside Silicon Valley also tend to job-hop less often and demand fewer perks like free burritos and hammocks in the office.
Investors say they like those non-Bay Area startups, too, because valuations tend to be a bit lower, which means each dollar of investment buys them a larger piece of a startup. For example, PayPal co-founder and venture capitalist Peter Thiel recently mentioned he was hunting for investments outside of Silicon Valley.
Becoming a tech hub has downsides, too. The emergence of spots like Silicon Slopes (Salt Lake City), Silicon Beach (in the Los Angeles area) and Silicon Mountain (Denver) has also coincided with big jumps in office rental costs in some spots.
Link to article: Tech Moving from Silicon Valley
San Francisco’s Office Vacancy Decreases to 6.8%
The San Francisco Office market ended the first quarter 2016 with a vacancy rate of 6.8%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 887,196 square feet in the first quarter. Vacant sublease space increased in the quarter, ending the quarter at 1,412,643 square feet. Rental rates ended the first quarter at $52.43, an increase over the previous quarter. A total of two buildings delivered to the market in the quarter totaling 480,000 square feet, with 5,352,288 square feet still under construction at the end of the quarter.
Absorption
Net absorption for the overall San Francisco office market was positive 887,196 square feet in the first quarter 2016. That compares to positive 680,988 square feet in the fourth quarter
2015, negative (297,950) square feet in the third quarter 2015, and positive 1,332,620 square feet in the second quarter 2015.
The Class-A office market recorded net absorption of positive 669,332 square feet in the first quarter 2016, compared to positive 689,681 square feet in the fourth quarter 2015, negative (25,939) in the third quarter 2015, and positive 825,531 in the second quarter 2015.
The Class-B office market recorded net absorption of positive 248,697 square feet in the first quarter 2016, com- pared to negative (39,232) square feet in the fourth quarter
2015, negative (216,768) in the third quarter 2015, and positive 555,278 in the second quarter 2015.
The Class-C office market recorded net absorption of negative (30,833) square feet in the first quarter 2016 com- pared to positive 30,539 square feet in the fourth quarter
2015, negative (55,243) in the third quarter 2015, and negative (48,189) in the second quarter 2015.
Net absorption for San Francisco’s central business district was positive 660,981 square feet in the first quarter 2016. That compares to positive 163,176 square feet in the fourth quarter
2015, negative (267,529) in the third quarter 2015, and positive 387,476 in the second quarter 2015.
Net absorption for the suburban markets was positive 226,215 square feet in the first quarter 2016. That compares to positive 517,812 square feet in fourth quarter 2015, negative (30,421) in the third quarter 2015, and positive 945,144 in the second quarter 2015.
Vacancy
The office vacancy rate in the San Francisco market area decreased to 6.8% at the end of the first quarter 2016. The vacancy rate was 7.0% at the end of the fourth quarter 2015,
6.6% at the end of the third quarter 2015, and 6.4% at the end of the second quarter 2015.
Class-A projects reported a vacancy rate of 7.7% at the end of the first quarter 2016, 8.0% at the end of the fourth quarter 2015, remained the same at 7.4% at the end of the third quarter 2015 compared to the previous quarter.
Class-B projects reported a vacancy rate of 6.7% at the end of the first quarter 2016, 7.1% at the end of the fourth quarter 2015, 6.7% at the end of the third quarter 2015, and
6.3% at the end of the second quarter 2015.
Class-C projects reported a vacancy rate of 3.8% at the end of the first quarter 2016, 3.7% at the end of fourth quarter 2015, 3.9% at the end of the third quarter 2015, and 3.6% at the end of the second quarter 2015.
The overall vacancy rate in San Francisco’s central business district at the end of the first quarter 2016 decreased to 6.3%. The vacancy rate was 7.0% at the end of the fourth quarter 2015, 6.0% at the end of the third quarter 2015, and 5.8% at the end of the second quarter 2015.
The vacancy rate in the suburban markets increased to 7.5% in the first quarter 2016. The vacancy rate was 7.1% at the end of the fourth quarter 2015, 7.5% at the end of the third quarter 2015, and 7.4% at the end of the second quarter 2015.
Sublease Vacancy
The amount of vacant sublease space in the San Francisco market increased to 1,412,643 square feet by the end of the first quarter 2016, from 1,352,132 square feet at the end of the fourth quarter 2015. There was 1,275,923 square feet vacant at the end of the third quarter 2015 and 1,102,001 square feet at the end of the second quarter 2015.
San Francisco’s Class-A projects reported vacant sublease space of 998,469 square feet at the end of first quarter 2016, up from the 967,996 square feet reported at the end of the fourth quarter 2015. There were 857,982 square feet of sub- lease space vacant at the end of the third quarter 2015, and 748,203 square feet at the end of the second quarter 2015.
Class-B projects reported vacant sublease space of 333,325 square feet at the end of the first quarter 2016, up from the 329,958 square feet reported at the end of the fourth quarter 2015. At the end of the third quarter 2015 there were 342,020 square feet, and at the end of the second quarter 2015 there were 298,324 square feet vacant.
Class-C projects reported increased vacant sublease space from the fourth quarter 2015 to the first quarter 2016. Sublease vacancy went from 54,178 square feet to 80,849 square feet during that time. There was 75,921 square feet at the end of the third quarter 2015, and 55,474 square feet at the end of the second quarter 2015.
Sublease vacancy in San Francisco’s central business district stood at 673,271 square feet at the end of the first quarter 2016. It was 595,812 square feet at the end of the fourth quar- ter 2015, 543,796 square feet at the end of the third quarter 2015, and 491,777 square feet at the end of the second quarter 2015.
Sublease vacancy in the suburban markets ended the first quarter 2016 at 739,372 square feet. At the end of the fourth quarter 2015 sublease vacancy was 756,320 square feet, was 732,127 square feet at the end of the third quarter 2015, and was 610,224 square feet at the end of the second quarter
2015.
Rental Rates
The average quoted asking rental rate for available office space, all classes, was $52.43 per square foot per year at the end of the first quarter 2016 in the San Francisco market area. This represented a 1.1% increase in quoted rental rates from the end of the fourth quarter 2015, when rents were reported at
$51.84 per square foot.
The average quoted rate within the Class-A sector was $54.11 at the end of the first quarter 2016, while Class-B rates stood at $51.77, and Class-C rates at $46.73. At the end of the fourth quarter 2015, Class-A rates were $53.77 per square foot, Class-B rates were $50.94, and Class-C rates were $45.57.
The average quoted asking rental rate in San Francisco’s CBD was $57.99 at the end of the first quarter 2016, and $50.36 in the suburban markets. In the fourth quarter 2015, quoted rates were $58.19 in the CBD and $49.47 in the suburbs.
Inventory
Total office inventory in the San Francisco market area amounted to 165,448,464 square feet in 3,843 buildings as of the end of the first quarter 2016. The Class-A office sector consisted of 77,319,980 square feet in 304 projects. There were 1,437 Class-B buildings totaling 64,146,043 square feet, and the Class-C sector consisted of 23,982,441 square feet in 2,102 buildings. Within the Office market there were 209 owner- occupied buildings accounting for 18,858,040 square feet of office space.
Sales Activity
Tallying office building sales of 15,000 square feet or larger, San Francisco office sales figures fell during the fourth quarter 2015 in terms of dollar volume compared to the third quarter of 2015.
In the fourth quarter, 14 office transactions closed with a total volume of $1,043,890,500. The 14 buildings totaled 1,634,104 square feet and the average price per square foot equated to $638.82 per square foot. That compares to 13 transactions totaling $1,955,263,000 in the third quarter 2015. The total square footage in the third quarter was 2,904,410 square feet for an average price per square foot of $673.20.
Total office building sales activity in 2015 was down com- pared to 2014. In the twelve months of 2015, the market saw 48 office sales transactions with a total volume of $4,814,873,500. The price per square foot averaged $651.62. In the same twelve months of 2014, the market posted 76 transactions with a total volume of $6,456,094,000. The price per square foot averaged
$544.50.
Cap rates have been lower in 2015, averaging 4.76% compared to the same period in 2014 when they averaged 4.88%. One of the largest transactions that occurred within the last four quarters in the San Francisco market is the sale of 333 Bush St in San Francisco. This 546,182-square-foot office building sold for $378,500,000, or $692.99 per square foot. The property sold on 12/24/2015, at a 3.70% cap rate.
source: CoStar 1st Quarter 2016 San Francisco Office Market Report
Source: CoStar News
By: Mark Heschmeyer
Dated Posted: April 11, 2016
Investing in high-vacancy office properties has always involved a lot of risk. That is no more true than in today’s market as more companies adopt more-efficient floorplans that allocate fewer square feet per employee.
However, recent research by Andrew Rybczynski and Suzanne Mulvee of CoStar Portfolio Strategy found that investors who did brave the odds and acquired high-vacancy office properties in this economic-recovery cycle have enjoyed superb returns. In general, value gains from acquiring low-occupancy office property, leasing it up, and selling have averaged 33% during this cycle versus just 20% in average value gains for the same strategy during the last one.
The research also found that office property in central business districts (CBDs) generated slightly more of these gains than suburban assets, as office users have shown a stronger preference for urban over suburban locations up to this point in the cycle.
The CoStar Portfolio Strategy team examined 44 million square feet of office buildings that sold after successfully executing an occupancy turnaround over the past 12 years. These turnaround buildings were defined as those that were initially acquired with occupancies below 70% and then resold one to four years following the initial sale with an occupancy improvement of at least 25 percentage points. The office buildings had to be 10,000 square feet or larger with an initial sale price of $5 million or more.
“The decline in cap rates has certainly provided more of a tailwind for office property values this cycle than was the case for the last one,” Rybczynski noted. “However, the outsized value gains realized more likely reflect the greater volatility in rent during this cycle, especially in urban areas. We observed that non-CBD submarkets in recent years have narrowed the gap in delivering appreciation returns, which suggests a better risk discount for non-CBD properties than previously available.”
Despite strong demand for core assets and the better price appreciation, the sales volume of successful turnarounds of office buildings with high vacancy has not reached the levels achieved at the peak of the last cycle (see Chart 2 above.) Although it appears more investors are targeting value-add properties today, Mulvee pointed out that more of these opportunistic investors appear to be holding their properties longer.
“While sales of office properties with sub-70% occupancies has been 33% higher over the past three years than in the comparable period of the last cycle, fewer of these assets have re-traded. It seems that these value-add investors are holding their positions longer, looking to increase occupancy and rent to maximize operating cash flows before eventually selling to achieve their return targets,” Mulvee said.
However, the window for successfully executing such a strategy may be closing. According to the CoStar Portfolio Strategy analysts, rent gains are expected slow this year for office space as new supply ramps up. As that happens, any additional reward for holding onto assets may not outweigh the heightened risk posed by new supply.
Link to article: Value Gains
Source: The Registry
By: David Goll
Date Posted: March 30, 2016
While some San Francisco real estate observers worry a sizable increase in office space available for sublease may signify a potential property “tech wreck” in the works, others view an increasing amount of available space as more of a corrective adjustment that’s creating some benefit.
According to a report from Cushman & Wakefield, the amount of office space being subleased in San Francisco, including the Financial District and SOMA, jumped from 1.3 million square feet in the third quarter of 2015 to nearly 1.7 million square feet in the fourth quarter. By the end of February, that number had climbed to 1.9 million square feet. As of March 21, 2016, JLL reports that this type of sublease availability has climbed to 2.28 million square feet in San Francisco.
About half of the space available for sublease is coming from technology companies, according to the JLL and Cushman & Wakefield reports. That translates to 45 of the 138 subleases in San Francisco, or close to 1.1 million square feet. And while 41 percent of companies gave contracting or consolidation as their reasons for subleasing space, 26 percent cited relocation inside the San Francisco city limits, while 22 percent are moving all or part of their businesses out of the city, according to Cushman.
“We saw the trend begin to intensify in the fourth quarter [of 2015],” said Christina Clark, senior vice president in the San Francisco office of Cresa Corporate Real Estate. “Our clients were starting to evaluate whether they were occupying too much space, what would be the best way to handle and utilize it. Others are wondering if the high costs are going to continue and whether it was worth getting into a seven-year agreement with unfavorable terms.”
As a result, Clark said leasing activity began to slow as companies “pushed the pause button.”
“We have been monitoring this trend since the second quarter of 2015,” said Andrew Nicholls, advisor in Cresa’s San Francisco office. “That’s when we noticed a distinct shift in the market.”
Colin Yasukochi, director of research and analysis in the San Francisco office of CBRE Group, the Los Angeles-based commercial real estate firm, said the subleasing trend became especially notable late last year, coming mainly from the tech sector. The reasons are varied.
“Some are expanding into new offices here in San Francisco, while some just have excess space they don’t need right now,” Yasukochi said. “There’s a variety of reasons. And what we are seeing, especially with high-quality subleased space, is that it’s not staying on the market that long. It frequently is leased within three to six months.”
Yasukochi said he doesn’t regard the current inventory of subleased space—which covers all grades of office space, but mostly A and B—to be an excessive amount.
“If there was, you would see much bigger discounts offered on space being leased directly from landlords, like 30 or 40 percent,” he said. “When the market is healthy, the discounts are not that large. Subleased space is increasing, but we’re not seeing large discounts.”
According to his research, Yasukochi said the amount of subleased space in downtown San Francisco has jumped from 1.1 million square feet in October to 1.7 million square feet in March. Unlike other observers, who predict that figure will grow substantially by year’s end, he is not quite as certain of that outcome.
“It could grow, but this is an evolving situation and that has yet to be determined,” Yasukochi said. “We will see if the supply continues to exceed demand.”
JLL’s figures tell a similar story today. Five of the largest eight sublease spaces are already in some form of discussions for the space to be subleased. Those top five available spaces are Charles Schwab’s 305,502 square feet at 215 Fremont, Dropbox’s two spaces at 185 Berry for a total of 212,000 square feet, Bingham McCutchen’s 98,000 square feet at 3 Embarcadero Center and Yahoo’s 60,000 square feet at 343 Sansome, which was just subleased to Airwave, a drone software platform company. If all these negotiations result in a new tenant, that would drop the available space to 1.6 million square feet, a 30 percent drop from where we are today. One thing to note, however, according to JLL’s report, is that 43 of the 138 available spaces came to the market in the last month, a 45 percent jump in absolute number of spaces. Some of this space includes nearly 25,000 square feet from Medium at 760 Market, nearly 34,000 square feet from Zenefits at 303 2nd Street, 18,000 square feet from Riverbed at 680 Folsom and 11,000 square feet from Box at 100 1st Street.
Asking lease rates for Class A office space downtown being offered directly from landlords averages about $76 per square foot annually, a figure which grew 14 percent in the fourth quarter of 2015, Yasukochi said. Though it would depend on the condition of the space being subleased by another tenant, asking lease rates would likely be about $65 per square foot annually this spring, he added.
“If it’s in good shape and there’s lots of interest in it,” Yasukochi said of space at those rent levels, which are reflective of the 10 to 15 percent discounts being offered.
Drew Arvay, senior vice president in the San Jose office of Cushman & Wakefield, said he’s aware of the glut of space available for sublease in San Francisco, but said it’s a different dynamic in Silicon Valley—or cities in Santa Clara, San Mateo and southern Alameda counties. It even goes by a different name.
“We call it shadow space,” Arvay said. “There are instances where companies are seeking to sublease space, but it often is on a short-term basis.”
On the other hand, Arvay said some of the Valley’s largest tech giants that occupy millions of square feet of office space might keep a few hundred thousand square feet empty for anything from storage to future productive use when they expand operations again.
“How companies are using space has really shifted in recent years,” he said. “We went from private offices and hallways to cubicles. The cubicles started out averaging 250 to 275 square feet of space per person, but then shrunk to 160 square feet. Now, cubes are disappearing and being replaced with even smaller work pods or benches, or shared space.”
But Silicon Valley companies are offsetting the downsized workplace trend by continuing to hire employees by the thousands, so they are reluctant to shrink their office footprints too substantially. Arvay said Gensler, the San Francisco-based architecture, design and planning firm, has dubbed Silicon Valley companies as the most efficient users of work space.
“That’s not to say we are immune from having surplus space that could be available for subleasing, but this is still a different situation from downtown San Francisco,” he said.
He added there is another dynamic at work in Silicon Valley and elsewhere in the corporate world over the past three years since Yahoo Inc. CEO Marissa Mayer famously ended her company’s popular work-from-home policy for employees.
“Employers have discovered innovation is born of collaboration, of employees talking to one another during the work day, talking over lunch,” Arvay said. “The money they used to save on renting space by having employees work in their pajamas from home was being lost by a decrease in developing innovative ideas.”
Both Clark and Yasukochi said they see another potential storm cloud on the horizon for San Francisco employers: the possible decrease in VC funding, mainly affecting the tech sector.
“We are hearing that while companies are still getting funded, some are getting less funding or having trouble getting another round of funding,” Clark said. “VC funding is critical, so we are watching that very closely. That trend really started accelerating in the fourth quarter, making tenants seriously consider whether they need so much space.”
Link to article: Sublease Conundrum
Highest Growth Levels since 2007
Source: CoStar
By: Mark Heschmeyer
Date Posted: March 23, 2016
For commercial property owners, 2015 was a very good year. According to early analysis of securitized loan results through February of 2016, the commercial properties backing the loans posted strong net operating income (NOI) growth, increasing 3.8% on average in 2015.
Average NOI for commercial property backing CMBS loans showed a big jump in 2015, compared with 2.66% in 2014 and 2.64% in 2013, according to analysis by Wells Fargo Securities.
The Wells Fargo analysis is based on NOIs reported for more than 6,000 loans in conduit CMBS transactions.
While Wells Fargo cautioned the results are preliminary, if the growth rate stays near the current level, it would mark the highest change since the financial crisis, surpassing the 3.4% annual NOI average increase in 2012.
Hotel, self-storage and multifamily properties backing CMBS loans were the lead profit-centers, driving average NOI increases of 8.6%, 8.5% and 7%, respectively.
Link to article: NOI Growth
Source: The Registry
By: Michael Hopek
Date Posted: March 21, 2016
Cushman & Wakefield regional director Robert Sammons forecast mixed housing and office markets for the next five years during a recent industry meeting of Bay Area real estate developers, investors, builders and lawers, expressing his concern that changes are needed if San Francisco is to continue growing.
The meeting of the San Francisco Real Estate Roundtable was presented by law firm Hanson Bridgett and dealt with the question of how long San Francisco’s real estate market boom could last. Sammons started the meeting by asking “How is everyone feeling about the economy right now?” The majority of audience members was undecided on the question, with a few skeptical about a positive economic future.
Sammons pointed out that the Bay Area is in its seventh year of expansion. “It’s about time for a downturn of some sort, whether that’s a correction or recession, that remains to be seen,” he said. San Francisco is in the top 10 cities for job growth, while San Jose is number one according to Cushman & Wakefield’s research.
The massive job growth due to the expansion of the technology industry has caused an influx of labor on a grand scale, he explained. From 2012 to 2015 the Bay Area population increased by almost 400,000 largely because of new technology-related labor growth. In the same time period the Bay Area added about 30,000 multifamily units, one for about every 13.5 people, meaning the region is dramatically lacking in housing growth.
Sammons stressed that this deficit is the real problem for residential housing in the city. “We are a mile behind in trying to build housing in this market,” he said. There are currently 21,000 units under construction and about another 53,000 proposed according to his company’s research.
The influx of jobs has impacted the office market, as well. That, Sammons said, makes it difficult for businesses to find affordable office space. Last year the city added 21,600 new office space positions at a growth rate of 5.6 percent. About 60 percent of the tenants in the office market are technology firms.
Of those technology businesses that lay off people because of poor company performance, some wind up putting space on the market to save money. Sammons said there is 1.9 million square feet of space available in the San Francisco market for sublease. There is currently 7.1 million square feet under construction or entitled in the city.
Sammons noted the impact of Proposition M, the1986 law that limits San Francisco’s office space development to roughly 875,000 square feet a year. Over time the city has built up a reserve of 1.8 million square feet in the city’s allocation fund, but that reserve is nearly gone. “We are going to be out of allocation this year, plain and simple,” he said.
Cushman & Wakefield forecasts that city office vacancy rates will continue to increase every year through 2021. Sammons suggested that the 9.9 percent office vacancy rate forecast is “not that bad.” The firm also predicts job growth to slow due to the high cost of living and renting office space, and the city’s inability to keep up with tenant housing demand.
Sammons concluded the presentation by stating that companies might start looking elsewhere for rental space in cities like Austin, Salt Lake City or eastern coastal cities. “It’s just too expensive to live here. So unless something changes, unless we are able to build more housing and pull back on price points, this is the pretty standard forecast,” he said.
Link to article: SF Office Slowdown
Google’s Medical Technology Division, Verily, Subleases Large Office Campus in South San Francisco
Source: CoStar
By: Steve Wells
Date Posted: March 9, 2016
Verily, formerly called Google Life Sciences, has subleased 407,000 square feet from Amgen to establish a separate headquarters in South San Francisco for the new Google division, which is gearing up to provide pioneering technology for medical research and devices.
Verily will occupy the former Onyx Pharmaceuticals office campus consisting of three Class A office buildings located at 249, 259, and 269 E. Grand Ave.
The planned move 30 miles north from Google’s Mountain View, CA, headquarters, will place the new firm within a global hub for the biotech industry. It also takes a big chunk of the nearly 700,000 square feet of excess space Amgen Inc. (NASDAQ: AMGN) is seeking to sublet in the area. Amgen closed its Onyx Pharmaceuticals subsidiary last year after acquiring the cancer drug developer in 2013 for $9.7 billion.
Alexandria Real Estate Equities, Inc., (NYSE: ARE), a real estate investment trust that focuses on science and technology campuses in urban locations, owns the three buildings. The recently developed campus also has two land parcels representing nearly 400,000 square feet of potential expansion space.
An initial 400 Verily employees are expected to relocate to the new campus by the end of this year with the expectation that the total number at the location could grow to as many as 1,000 through future expansions.
“We are honored that Verily has chosen to expand into one of Alexandria’s world-class collaborative science and technology campuses,” said Stephen A. Richardson, chief operating officer and San Francisco regional market director of Alexandria. “Through our long-term relationship with Google, which dates back to 1998, we have been able to provide Verily with highly curated, innovative and integrated campus solution, which will help support its mission to use technology to better understand health, as well as prevent, detect and manage disease.”