Cushman & Wakefield Sees 2018 a Record-Setting Year for San Francisco Office Market

Bay Area, Behavioral Sciences Future of Work Forum, San Francisco, Corporate Office Spaces

SAN FRANCISCO, Calif. (January 10, 2019) – 2018 was a year for the San Francisco history books, according to Cushman & Wakefield’s year-end office market report. The firm’s quarterly publication revealed San Francisco produced a number of records this past year in the dominant office sector, including record high rents and new construction deliveries. In addition, vacancy reached a three-year low, while tenant requirements (demand) held strong.

Also favorable to the market’s economic stamina, the most recent San Francisco metropolitan division (San Francisco and San Mateo counties) unemployment rate was a minimal 2.2%, dropping even further below the year ago figure of 2.6%. Year-over-year (YOY) total private sector jobs increased by 2.0% to 1,023,600 while office using positions increased 2.5% to 397,400.

Overall San Francisco office market vacancy closed 2018 at just 6.4%, with both North and South Financial submarkets—the two largest countywide based on square footage—coming in at 7.7%. Other core submarket vacancies included SOMA (3.1%), Mid-Market (4.3%), and Union Square (5.8%). Notably, Mission Bay had zero office vacancy.

Robert Sammons, Cushman & Wakefield’s Research Director in Northern California, said “New leasing totaled 1.9 million square feet (msf) in the fourth quarter of 2018 with annual activity reaching 8.9 msf, placing 2018 as the third highest year on record behind 2014 and 2000. Overall net absorption, or occupancy growth, totaled 4.8 msf in 2018, with a substantial portion due to ‘big tech’ occupiers moving into new construction.”

According to the report, Google signed the largest lease in the fourth quarter taking 330,000 sf at One Market – Landmark in the South Financial District. In early January, Google also announced they had leased another 190,000 sf block of space during the fourth quarter at One Maritime Plaza in the North Financial District. Their top lease was followed closely by Salesforce taking 325,000 sf at 550 Howard St. Nearly all of the largest transactions during the fourth quarter were tech expansions and were either companies with established credit or unicorns. The majority of these deals also exceeded 100,000 sf.

“San Francisco continues to be a sought after market for office users, especially from tech, for a number of reasons pertaining to their business strategy,” said Matt Chatham, Cushman & Wakefield’s Tenant Representation Lead in the San Francisco Bay Area. “At the end of 2018, we were still tracking upwards of 5.2 msf in tenant demand across San Francisco. That is being mostly lead by large block demand, which was up 17% year-over-year.

Chatham added, “So long as the political environment and securities markets stabilize, the direct and sublease space market could remain very tight through 2019 thanks in part to very little available new construction delivering in the near term. That would mean that plans by large occupiers for growth or relocation could be impacted. However, if the headlines from late 2018 continue, there could be other large available opportunities that come to market, potentially from large users that have had a big leasing appetite, but have yet to occupy their new facilities. It will be interesting to see where we stand at the end of the first quarter of 2019.”

New construction remains a critical source for activity and demand, but is there enough space to go around? The report states new construction completions totaled 3.7 msf in 2018 and closed the year 100% pre-leased.

Derek Daniels, Senior Research Analyst with Cushman & Wakefield in San Francisco, said, “Just under 3.1 msf was under construction at the end of the fourth quarter. All projects scheduled to deliver in 2019 are already fully committed: 751,500 sf at Park Tower in South Financial pre-leased to Facebook and 1,023,000 sf in Mission Bay is pre-committed to Uber. The remaining projects located in South Financial have not cemented commitments: 270,000 sf at 633 Folsom and 1,050,000 sf at Oceanwide Center. However, these projects are also not set to deliver until 2020 and 2022, respectively.

Perhaps the biggest news for future development in San Francisco was the passage of the Central SoMa plan by the San Francisco Board of Supervisors and the subsequent signing into law by Mayor London Breed. The plan will up-zone much of the area to create higher density transit-oriented office and housing.

Sammons said, “A total of 2.9 msf remains in San Francisco’s Prop M large cap office allocation pool as of December 2018. That said, there is 5.6 msf of pending projects in Central SoMa which could easily wipe out that entire availability.”

With deal activity and future demand holding strong, the report also noted that average asking rates for office product in San Francisco continue to set new high marks. The citywide overall asking rent closed 2018 at a record $75.57 per square foot (psf), up another 6.4% year-over-year. Meanwhile, the CBD Class A direct asking rent also set a record of $82.12 psf, up 8.0% year-over-year.

With solid market trends and indicators across the board, San Francisco’s investment sale activity also reported an uptick towards the later stages of 2018.

Seth Siegel, Executive Managing Director with Cushman & Wakefield’s Capital Markets in San Francisco, said, “While the total number of transactions in 2018 will be in line with 2017, there are a number of sales (most in-contract) expected to close in the first quarter of 2019. Sales were brought to market later in the year than normal as sellers looked to capitalize on very strong leasing conditions and buyer demand. A number of pending transactions are expected to close above $1,000 psf.

According to the report, the top investment transaction of the fourth quarter by price per square foot was the sale of The Ferry Building. Hudson Pacific Properties, in a joint venture with Allianz, purchased the historic mixed-use building for $1,217 psf from the Blackstone Group.

The end-of-the-year report also briefly delved into the IPO market, projecting that 2019 will be a bellwether year for San Francisco tech IPO’s, with a handful of large tech occupiers considering going public. Such companies have demonstrated massive growth over the past several years and will seek liquidity in a stock market that has shown recent signs of volatility.

CLICK HERE to access Q4 2018 San Francisco Office MarketBeat Q4 2018 Report

CLICK HERE to access Q4 2018 San Francisco Office Market Infographic: Six Quick Stats

About Cushman & Wakefield
Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for real estate occupiers and owners. Cushman & Wakefield is among the largest real estate services firms with 48,000 employees in approximately 400 offices and 70 countries. In 2017, the firm had revenue of $6.9 billion across core services of property, facilities and project management, leasing, capital markets, valuation and other services. To learn more, visit or follow @CushWake on Twitter.

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