Cushman: San Francisco Recovery Here to Stay

By Sharon Simonson

Can San Francisco and its technology companies remain an island of calm in the ongoing economic storm? Yes, say researchers and an economist for global brokerage and real estate services firm Cushman & Wakefield.

New research looking at mid-year results for the national office market, including six of the country’s largest metropolitan areas in depth, show a nation where large users are often paralyzed with caution, favoring renewal in existing space over the cost of moving and upgrades, but where technology companies in isolated pockets continue to expand.

While companies are still leasing and occupying more space on a nationwide basis than they are giving back—positive net absorption in brokerspeak—it is not at all clear that this year will be stronger than last. “In 2008 and 2009, we saw negative net absorption [nationwide]. We got better in 2010, and 2011 was a fairly strong year. 2012 will be comparable to last year—we hope,” said Maria Sicola, head of Americas research for the company.

But both San Jose and San Francisco are on far more favorable paths. San Jose has regained more than 91 percent of the jobs that it lost in the recession, and San Francisco has regained just over 70 percent, according to Cushman. Of 22 major U.S. markets, those performances place San Jose fourth behind Houston, New York and Washington, D.C., all three of which now have more jobs than they did before the recession; San Francisco ranks seventh after Dallas and Denver. Moreover, San Francisco has recorded more new leasing activity—excluding renewals—in the first half than it did in the comparable periods of 2010 and 2011.

In contrast, New York and Washington, D.C., both of which led the national office market recovery in 2010 and 2011, are now cooling. In Manhattan, new leasing activity—again excluding renewals—was slightly more than 11 million square feet in the first half of the year. That compares to 17.9 million square feet in the first half of 2011 and 12.8 million in the first half of 2010.

In New York, “[l]arge corporate occupiers of space are much more cautious than a year ago,” said Cushman Senior Economist Ken McCarthy. At the same time, in the Midtown South submarket, which is the preferred location for tech companies, “that is the tightest [market] in the country by far,” he said.

New leasing activity in Washington, D.C., a market dominated by the federal government, is also below last year’s first half and the first half of 2010.

Nationally, the issue is neither overbuilding nor a flood of sublease office space, both factors in previous, unhealthy office markets. Rather, it all comes back to economic and jobs growth, both of which are weak. “This is the most severe recession and slowest recovery” of the last eight, McCarthy said.

Looking at the change in gross domestic product in the 12 quarters since hitting the cyclical low, this recession has seen GDP growth of 6.8 percent, he said. That compares to 12.9 percent GDP growth on average during the eight previous recoveries and 8.4 percent GDP growth on average in the last two recoveries.

Nationwide, the country lost 8.8 million jobs during the recession but has regained only 44 percent of them. Looking only at office-using employment, the country lost 2.5 million office jobs from the end of 2007 through October 2009, but has regained only 1.4 million, primarily in professional services. And Oakland lags the pace of national jobs recovery, regaining less than 20 percent of the jobs that it lost.

That is comparable to Los Angeles County, which has regained only 25 percent of its jobs lost, according to brokerage research. The second quarter saw Los Angeles County’s first gain in occupied space after 14 quarters of negative net absorption, though renewals still dominate leasing. Office vacancy in Los Angeles is not expected to trend downward until 2014, said Petra Durnin, Cushman & Wakefield’s western region research director. In a telling signal, Los Angeles developers have begun to acquire historic, Class B buildings where they intend to create “cool, funky space to attract tech [companies],” she said.

Despite the larger malaise, Caroline Green, Cushman’s research director in Northern California and the Pacific Northwest, said she believes that San Francisco can still fare well. “The San Francisco economy is very different. Companies are trying to do more with less, and they are turning to technology to be more efficient,” she said. “So we see the recovery as sustainable.”

“The tech growth this time around is much different from last time,” McCarthy said. “Last time, it was building the infrastructure. This time it is the content, and the leases are by established companies that were there in the last boom and are still here.”

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