Accelerated Leasing Activity Continues

Colliers San Francisco Reports that for the first time since 2004, Tenants Lease 2 million Square Feet for the Second Consecutive Quarter

SAN FRANCISCO, July 3, 2012 – The San Francisco office market unabated by the uncertainty of the global economy in the second quarter continued the positive momentum from the first quarter across all asset classes.  Job growth and increased productivity due to the technology sector, San Francisco continues to outpace the rest of the country, benefitting by its close proximity to Silicon Valley and fueled by the accelerated growth of this sector. The second quarter marked the eighth consecutive quarter to post positive net absorption. The positives are visible around the city and proof of the increased employment can be seen by the continued high volume in leasing.  According to Colliers International San Francisco, this quarter posted again over 2 million square feet of office leasing at 2.14 million square feet of transactions, which marks the first time since 2004, this city experienced two consecutive quarters of more than 2 million square feet of leases.

Rental rates again increased in the quarter as strong absorption and decreasing vacancies continued to put pressure on rates, marking the ninth consecutive quarter where overall San Francisco rental rates have increased from a low in the first quarter of 2010 of $27.22. Flight to quality was exhibited in the quarter as Class A buildings market wide experienced 507,067 square feet of net absorption, as more tenants are expanding and heading to quality assets. Rents increased across all market classes noticeably anchored by South of Market rents which increased almost 15 percent non-weighted.

Large blocks of space again were leased up in the second quarter.  Colliers International recorded eight transactions over 50,000 square feet, putting twenty-one such transactions year to date. San Francisco saw twenty-two transactions above 50,000 square feet in 2011. Since 2001, transactions over 50,000 square feet have been over 21 twice and San Francisco has already achieved this in the first half of 2012. This year will see the highest volume since 2000. Fast growing tech companies continue to quickly snag up large blocks in anticipation that they will occupy the space in a few years, believing they will receive lower rents today than in two years.

[table] Address,Company,Square Feet,Type,Date
888 Brannan Street, Airbnb,”169,538″,New,Apr-12
1 Market Street (Steuart),Autodesk,”108,366″,Expansion,Jun-12
140 New Montgomery Street, Yelp,”98,144″,New,May-12
1355 Market Street,Twitter,”85,259″,Expansion,May-12
188 Spear Street,Amazon,”83,154″,New,Jun-12
600 Townsend Street,Salesforce,”82,852″,New,May-12
1355 Market Street,Yammer,”78,792″,New,Apr-12
989 Market Street,Zoosk,”51,810″,New,Apr-12

Largely driven by well-funded technology firms either entering the San Francisco market for the first time or expanding an existing footprint, the city experienced 426,066 square feet of positive absorption during the quarter, which brought the year to date total to 759,457 square feet.

Large technology expansions included Twitter, Linkedin, GREE International, and Medivation. Twitter, who moved in to the newly renovated Market Square at Ninth and Market Streets, expanded from about 100,000 to 215,000 square feet with its move and is planning on expanding into the top two floors of the building in the near future.

The second quarter marked the eighth consecutive quarter of overall office vacancy decreasing from the 15.2% peak in 2010 to 11.6%.

Despite the larger tenant requirements over 100,000 square feet diminishing, tenant requirement remains stable as according to Colliers International San Francisco’s Research, there is currently almost 4 million square feet of office space requirements, consisting of 156 tenants, with about 50% of the requirements consisting of technology companies. Though it is highly unlikely that 100 percent of these tenants will fulfill their stated space needs, this does provide an indicator that there will continue to be healthy leasing activity the remainder of the year complementing the large transaction activity of the first half of the year.

The SOMA East submarket, continued tightening as the vacancy decreased to 4.2% from 5.7% in the first quarter. This area, the focal point for the technology startups in the city, continues to benefit from the influx of technology companies from outside of San Francisco as companies such as InMobi and Speed relocated to San Francisco this quarter. Twitter’s move to Mid-Market decreased the vacancy in this submarket from 22.5% to 17.2% as the city of San Francisco continues to push the resurgence of this neighborhood with a payroll tax incentive.

With tenant demand remaining high and projected positive absorption the remainder of the year, we expect vacancy to continue to decrease and perhaps edge closer to sub-10% in the next year.

Rents continued the positive momentum of the past two quarters, climbing in the second quarter as strong demand and activity have tightened the market, average rental rates once again increased across all asset classes to heights not seen since 2007. The San Francisco office market saw an increase of about 5% as overall rents increased to $42.36 (non-weighted) from $40.43 in the first quarter.

Full news release: PRESS RELEASE_Q2

The SOMA submarkets were the story of the second quarter, as these two submarkets outperformed the Central Business District both overall and in Class A comparisons. SOMA East and West had a combined overall rental rate of $46.97 (non-weighted) and Class A rate of $52.40 (non-weighted) a 14% and 21% from the first quarter respectively. This compares to the North and South Financial District which posted non-weighted rents of $43.84 overall and $45.14 for Class A buildings.

Flight to quality continues to be in full swing as Weighted Class A rents have increased overall year to date to $50.34 from $44.56 a 13% increase. As space continues to be sparse, especially for the larger blocks of space, we fully expect rents to continue to surge for the remainder of the year, and Class A rents, specifically in the trophy Financial District buildings to drive the climb.

Weighted Class B rents increased by double digits in the second quarter, 13.5% to $45.74. Non-weighted B averages increased 12.4%, making up the previous lag from other asset classes with large increases this quarter.

About Colliers International
Colliers International is the third-largest commercial real estate services company in the world, with over 12,300 professionals operating out of more than 520 offices in 62 countries. A subsidiary of FirstService Corporation (NASDAQ: FSRV; TSX: FSV and FSV.PR.U), it focuses on accelerating success for its clients by seamlessly providing a full range of services to real estate users, owners and investors worldwide, including global corporate solutions, brokerage, property and asset management, hotel investment sales and consulting, valuation, consulting and appraisal services, mortgage banking and research. Commercial Property Executive and Multi-Housing News magazines ranked Colliers International the top U.S. real estate company. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world.

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