San Francisco Office Sales Near Historic Levels

Source: The Registry Bay Area Real Estate
Author: Nancy Amdur

San Francisco office sales are reaching near historic levels in 2014, mainly due to fast-growing technology companies and limited supply, real estate analysts said.

Office sales in the city are on track to hit $6.7 billion this year, the second highest volume total in history, according to a report by commercial real estate services firm CBRE Group, Inc. Further, the average price per square foot for Class A office space is at a record high of $648.

“San Francisco is one of the hottest investment markets in the country, and it’s garnering the attention of investors all over the world,” said Colin Yasukochi, the director of research and analysis at CBRE in San Francisco.

“The primary driver of the office market is the technology-driven economy that has created a tremendous amount of demand for office space here in San Francisco, and it’s increasing the rents, which increases the income potential of properties and attracts investors,” Yasukochi said.

Foreign investors, pension funds and other institutional investors are among the players in the market, real estate analysts said.

“[Investors] are looking to put money into a market where they see their income potential continue to grow over the long term,” Yasukochi said.

“There is a lot of money looking for prime assets in gateway cities and San Francisco, given the strong leasing and the strong rent and the strong rent projections, will continue to attract capital,” said Caroline Rooney, the managing director for capital markets at real estate brokerage Cushman & Wakefield in San Francisco.

San Francisco’s office market has been on the upswing since 2011, but the highest sales volume was in 2007, with $9 billion. That was mainly attributed to the sale of Equity Office Properties Trust’s portfolio, Yasukochi said.

The largest transaction so far this year was New York-based Blackstone Real Estate Partners’ $550 million purchase of a 49 percent stake in One Market Plaza, he said. Morgan Stanley Real Estate sold it for approximately $750 per square foot. New York real estate investment firm Paramount Group, Inc. is the majority owner of the 1.6 million-square-foot property.

Last month, a joint venture of Norway-based Norges Bank Investment Management and New York pension fund TIAA-CREF paid $390 million, or roughly $748 per square foot, for 405 Howard St. GE Real Estate and Langley Investment Properties sold the 521,000-square-foot property.

Also in September, Paramount Group paid $395 million for 50 Beale St. The firm bought the 662,000-square-foot skyscraper for about $596 per square foot from Rockefeller Group Investment Management Corp., on behalf of a joint venture of Rockefeller Group U.S. Premier Office Fund LP and Mitsubishi Estate New York.

“[This building] is the type of iconic asset where we believe we can utilize our operational expertise to attract and retain a premium tenant base and enhance cash flow over time,” said Paramount President and CEO Albert Behler in a statement.

“People want to be in San Francisco,” said Ben Thypin, the director of market analysis at New York-based global research firm Real Capital Analytics. “Demand from tenants and employees, but also competition from investors are driving this activity.”

Indeed, businesses seem to covet a San Francisco address. With 7.6 million square feet of city office space leased through the third quarter this year, the amount already surpassed the previous full-year leasing record of 7.4 million square feet, set during the dot-com boom in 1999, said Robert Sammons, a San Francisco-based regional research director at Cushman & Wakefield. Vacancy for Class A space in the city totaled 7.9 percent through the third quarter this year, he said.

Technology companies, such as Salesforce, Google, LinkedIn and Uber, took much of the space. Competition for space is helping to boost rents, but prices are not peaking, Sammons said. The average rent per square foot for Class A office space citywide is $61.38, and in 1999 it was $75.24.

San Francisco led the nation in rent growth in the first half of this year, according to a Real Capital Analytics report, and prices may jump at least 20 percent over the next three or four years, Rooney said.

Rising prices may push demand to neighboring markets.

“This cannot continue forever. It’s likely that this demand will eventually spill over into the East Bay and the South Bay” where space might be less expensive, Thypin said.

For now, demand is expected to continue as tech firms seek to attract employees with city space, analysts said. Also, new supply is limited, in part by Proposition M, which caps the amount of San Francisco office space that can be built annually.

“What [investors] are pursuing is a market that has strong growth and a continued appetite for office space,” Yasukochi said. “It’s a market that is becoming even more supply constrained as we run up against the limit on how much new development can occur in the city. Investors see the market as having strong upside potential.”

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