San Francisco Office Market | Calco Commercial, Inc.

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: Bisnow
By: Allison Nagel
Dated Posted: January 26, 2016

For the first time in history, San Francisco’s office rents have blown past Manhattan, recognizing the city and the Bay Area’s shift toward becoming the nation’s power center as more major companies establish a presence in the area. We chatted with Colliers regional executive managing director Alan Collenette about the brokerage’s new report.

Calling it San Francisco’s “Glittering Age,” Alan says the shift west with the growth of the tech industry marks an era, not a short-lived boom.

San Francisco is the nation’s healthiest office market, Alan says. He argues the world has shifted to a knowledge-based economy that thrives on innovation, and San Francisco is its epicenter as the home to major tech firms, such as Apple, Google, Facebook, Pinterest, Twitter and more, according to the report released by Colliers.

While there has been a lot of consternation about world events and economic woes, Alan tells us the worry may be blown out of proportion. On China in particular, he says exports only account for 13% of the US economy (and China makes up less than 8% of that, or just 1% of our overall economy). China is still growing strongly (more than twice the rate of US growth) with currency that hasn’t been devalued nearly as much as the currencies of other major US trading partners, he tells us. So China may import fewer products and services from the US, but will have a relatively limited direct hit on our near-term economic growth.

In addition, Alan tells us the US added an average of almost 300,000 jobs a month in Q4 and the yield curve (that harbinger of recessions) is still upward sloping (the spread between 10-year and two-year bonds is above its long-term average). Both are signs of a strong economy.

The brokerage firm’s year-end office market research study found:

-Office rents higher in San Francisco ($72.26/SF) than Manhattan ($71.26/SF);
-Vacancies of 7.2% in San Francisco vs. 9.6% in Manhattan;
-Annualized rents are up 11.8% in San Francisco;
-Sublease space at 0.7% of San Francisco’s 90M SF office market (compared with a high of 5.1% after the dot-com bust of 2002 and 1.6% during the recession in 2009);
-Absorption rates totaled nearly 180k SF in Q4 (total absorption for the year was 1,569,532 SF);
-Nearly 6.3M SF leased in San Francisco in 2015;
-36 office sales transactions totaling $3.7B closed during the year (compared with 50 sales for $5B in 2014, but still above the historical averages of $2B to $3B);
-Class-A prices rose to $675/SF, compared with $615 a year ago; and Class-B prices rose to $573/SF from $508 a year ago.

The report notes San Francisco’s 7.2% vacancy rate for Q4 included four office properties that are pre-leased but not occupied (the study only counts occupied buildings): 350 Mission St, 222 Second St, 333 Brannan St and 345 Brannan St. Those buildings are expected to be occupied in the first half of this year, dropping the vacancy back to 7% or lower.

Such growth, a strong economy, high leasing rates, pre-leasing and a robust pipeline of projects under construction mean that 2016 will remain strong for office development, the study notes. Overall, there is nearly 5M SF total under construction with 36% of it pre-leased, Alan says.

Read more at: SF Office Rents Top Manhattan

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