The New Year is off to another solid start as the San Francisco office market continues to be a magnet for new and expanding companies. The City has become an urban tech hub with job growth surpassing Silicon Valley over the last three years; young companies are drawn to the collaborative environment and urban amenities that San Francisco has to offer.
Vacancy rates have continued to drop, down a full percentage point from the end of 2013. As companies continue to vie for space, pre-leasing is becoming a more common practice in the office market; over half of the 3.8 million sf of construction is currently in contract or already leased, a strong indicator of a very hot market.
The San Francisco office market remains one of the strongest markets in the country with over 6 million sf of demand currently being tracked, including nearly 15 tenants looking for 100,000 sf or greater. Five lease transactions larger than 100,000 sf were completed in the first quarter of 2014 alone, which is more than half of the total deals over 100,000 sf made in all four quarters of 2013. Many tech giants are expanding their footprint in the city including Practice Fusion, who signed a 101,825 sf deal at 650 Townsend and Twitter, whose 313,206 sf transaction at 1 Tenth was by far the largest deal of the quarter. Dropbox, who accounted for 3 of the top 5 lease transactions also expanded 110,664 sf at their 185 Berry office as well as pre-leased 180,000 sf and 118,000 sf at 333 Brannan and 345 Brannan respectively.
Although Q1 was a strong leasing quarter, investment activity was lackluster. While 101 Second, the largest sale recorded in the quarter, achieved a very high price per square foot ($765), the overall volume of transactions was down. Despite a modest first quarter, office sales are projected to improve over the course of 2014 as investors look to capitalize on the increasing building values, driven by demand and high rents. Investment sales are already looking stronger, with 221 Main expecting to close next quarter and more high-value buildings, including 225 Bush and 650 California, currently on the market.
Rental rates increased 5% from the beginning of last year and as the San Francisco market continues to thrive, rates are expected to increase throughout the year. Q1 marked the sixteenth consecutive quarter of positive absorption and with a number of large deals still pending, absorption should stay positive into the next quarter.