Colliers Declares Golden Age Is Now in San Francisco Office Market

Tech Firms Continue to Power Record Office Market Activity in San Francisco During Fourth Quarter, Trend will Continue Well into 2015, Colliers Reports

SAN FRANCISCO  – With memories of The Great Recession of 2008 receding faster with each passing quarter, a wave of technology companies continued to surge into San Francisco at unprecedented levels during the fourth quarter, devouring existing office space by signing long-term leases and buying once-languishing investment properties, translating into a healthy fourth quarter and foreshadowing what should be a robust 2015, Colliers International has reported in its fourth quarter report on the office market.

With positive net absorption of more than 257,000 square feet recorded in the fourth quarter, San Francisco eclipsed the annual absorption level recorded for the past 12 years with 2.8 million square feet of net growth for the year, far exceeding the City’s annual average of about 1.1 million square, the report noted. The final three months of the year also was the 18th consecutive quarter of positive net absorption, an enviable record by any measure, but especially when compared to many other major metropolitan areas that have continued to witness stubbornly high vacancy rates and inconsistent rates of absorption, Colliers reported.

“San Francisco’s Golden Age is here now,” declared Colliers Executive Managing Director Alan Collenette. “This is the Gold Rush, and the currency is innovation. The City is now the undisputed urban epicenter of the world’s knowledge-based economy. The rate of acceleration in the Bay Area economy dwarfs that of the U.S., a contrast that makes San Francisco‘s explosion all the more stunning. It is impossible to overstate the cause and effect of the deluge of tech sector venture funding entering the Bay Area (51 percent of all U.S. VC money), as it encounters a heavily constrained supply of office space and housing.”

Due to new construction hitting the market, the vacancy rate remained flat this quarter at 7.5 percent. Vacancy has decreased for four straight years, the report said, and that’s a 51 percent shrinkage rate since the most recent peak of 15.2 percent in 2010. For the year, 1,557,396 square feet of newly completed space was added to the market, the report disclosed. Overall, the City had a total 89,580,305 square feet of existing office space in all classes at year end. Colliers also reported 5,161,899 square feet of office space under construction at year end with another 12,643,043 either proposed or in various stages of planning.

As a result of the high volume of leasing and sales, occupancy levels climbed in several of the City’s key submarkets during the quarter, including the South Financial District and Potrero East submarkets, which experienced the biggest jumps in occupancy at 148,453 and 99,930 square feet of positive net absorption, respectively.

In the South Financial District, the rise in occupancy levels was attributed to the newly delivered 535 Mission Street development, where Trulia moved into approximately 104,000 square feet. In addition, DocuSign, SocialChorus, and Sift Science collectively moved into nearly 42,000 square feet of sublease space at 123 Mission Street. In the Portrero East submarket, key contributors to the positive net absorption were Invuity moving into over 38,000 square feet at 444 De Haro Street and Dot & Bo occupying some 21,000 square feet at 200 Kansas Street, Colliers reported.

At year end, the report noted, the City recorded 14 transactions totaling more than 100,000 square feet with three of those closing in the fourth quarter, including Kirkland & Ellis’ renewal/expansion of 125,000 square feet at 555 California Street; Pinterest leasing more than 120,000 square feet at 651 Brannan Street; and Yelp accounting for 102,324 square feet at 55 Hawthorne Street. Notable among the other four leases in the fourth quarter was Uber’s new lease of 77,644 square feet at 685 Market Street, again underscoring the wholesale movement by tech firms to to the City.

There were a total of 14 office sale transactions during the fourth quarter for a combined value of $1.9 billion, compared to 16 sales of office properties sold in the third quarter for a combined value of $2.0 billion, Colliers noted. In the first half of this year, the company recorded 22 office sales for a total of $2.55 billion. For the full year, Colliers recorded 50 sales of office properties for a total of $5 billion. In comparison, 2013 experienced 45 office sales closed for a total value of $2.38 billion.

Overall weighted rental rates for Class A assets reflected an increase of 2.6 percent for the quarter and annualized rents continued to climb and finished the quarter and the year up 18.4 percent, resuming its normal pattern of rental increases that had been interrupted in the third quarter when rents artificially declined, the reported noted. Collenette said the third-quarter decline was an anomaly due to tenants moving into previously committed large blocks of space in newly completed projects or buildings that were under construction at the time.

On the investment front, the San Francisco office market continues to be one of the nation’s strongest due to a variety of factors that are tied indirectly to the movement of tech firms to the City. These include job growth generated by these high-growth firms, the continuing rise is leasing levels and prices, a demand factor that is growing, and an abundance of available capital to invest, the report explained.

Demand for assets in the San Francisco market from both domestic and foreign capital sources continued to be voracious during the fourth quarter, the report noted. There were a total of 14 office transactions closed this quarter for a combined value of nearly $1.9 billion. This year there were 50 office sales closed for a total of $5 billion.

In comparison, 2013 experienced 45 office sales for a total value of $2.38 billion, Colliers reported. Prices continued to rise for Class Aassets this quarter, as the average increased to $603 per square foot from $581 per square foot in the third quarter. Conversely, prices for Class B assets softened slightly to $503 per square foot from $520 per square foot, the report noted.

The Financial District continued to dominate investment sales, accounting for over half the investment sales during the fourth quarter. The two largest sales that closed were in the south Financial District, where 50 Beale Street sold for $395 million, or $595 per square foot, and 405 Howard Street sold for $390 million, or $748 per square foot. Colliers also cautioned that sales prices will continue to climb well into 2015, although it expects that sales volumes may slow.

With all of the new companies coming into the city, demand has gone through the roof for both new and existing office properties,” said Colliers Executive Vice President Tony Crossley. “We are finding that investors – both institutional and individual – are all trying to figure a way into this office market and the opportunities and the capital are both there.”

San Francisco’s job market continued to move in lockstep with the wave of tech firms relocating to the City and fueling the rise in office leasing levels during the year. This was reflected in the latest employment numbers from the California Employment Development Department (EDD), which showed that the number of employed in San Francisco grew from 470,800 to 481,900. The overall unemployment rate in the fourth quarter fell to 4 .3 percent, among the lowest rates in the state. Overall, the California unemployment rated also improved during the quarter, dropping to 7.3 percent. Nationally, the unemployment rate edged down to 5.8 percent.

In terms of new construction, Colliers reported that 307,235 square feet of new office product was delivered to the market in the fourth quarter, and all of that was in one project, 535 Mission Strteet. Of that total, approximately 104,000 square feet of that was pre-leased to Trulia. Year to date, 1,557,396 square feet of new and renovated space was added to the market. Currently, there is 5.2 million square feet under construction and approximately 64 percent, or 3.3 million square feet, is pre-leased, the report found.

“Despite the record amount of activity we’ve seen this year, we expect all of this new space to be absorbed quickly and demand to continue rising,” said Colliers Executive Vice President Mike McCarthy. “Unlike so many other markets in the country, we have the advantage of catering to the new wave of tech firms that are just powering this office market.”

About Colliers International
Colliers International is a global leader in commercial real estate services, with over 15,800 professionals operating out of more than 485 offices in 63 countries. A subsidiary of FirstService Corporation, Colliers International delivers 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 insightful research. The latest annual survey by the Lipsey Company ranked Colliers International as the second-most recognized commercial real estate firm in the world. For the latest news from Colliers International, visit colliers.com/us/news or follow us on Twitter: @ColliersIntl

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