Avison Young: Q2 San Francisco Office Market Monitor

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San Francisco’s unemployment rate declined to 7.4 percent in May after hovering near the 8 percent national average at the start of the year. Job growth, primarily driven by the technology sector, is helping to fuel the current period of strong leasing activity. Across the city vacancy rates are down an average of 3.6 percent from a year ago, and nearly 1 percent lower than last quarter. Vacancy rates have steadily declined in the last two and a half years with the past few quarters taking on steeper decreases. In highly competitive neighborhoods like SOMA, Class A buildings have a mere 2.6 percent vacancy rate, and a notable average asking rent of $57.50 per square foot (psf) full service.

This quarter marks the two year point for consecutive quarters of positive absorption. Young, rapidly growing, and highly successful tech companies (fittingly named “gazelles”) have led the way in both newly signed leases and large moves this past quarter. Social media companies like Twitter (215,000 sf) helped establish some of the largest sweeps in absorption. Airbnb and Yelp, two other gazelles, inked two of the top five leases for a combined 264,800 sf. Even with planned renovations and some new construction, relatively little supply is expected to be added to San Francisco’s office market. Coupled with sustained tenant demand, rates will push into new territory.

Trends to Watch

  • Increasing Rents. Steady declines in vacancy, little new supply entering the market, and the allure of San Francisco for tech-related tenants will continue to increase rents.
  • Tech Dominated Leasing. Major leasing activity will continue to be dominated by the younger, well-funded, and large revenue generating tech “gazelles.”
  • Uptick in Sale Activity. San Francisco’s position as one of the most impressive markets in nation will heat up building sales and their asking price.
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