JLL sees further office sector tightening as big PwC lease at 405 Howard takes more state-of-the-art, large floor plate space off the market
SAN FRANCISCO (Aug. 22, 2018) – Leasing activity in San Francisco’s office market shows no signs of slowing down in the second half of the year despite a frenetic pace of transactions in the first six months. Last quarter alone, JLL tracked 2.3 million square feet of leasing activity in spaces larger than 20,000 square feet. Not surprisingly, total vacancy has declined and now stands at 7.7 percent, a 1.40 percent drop from the prior quarter and the lowest vacancy since the fourth quarter of 2000.
Unlike past real estate cycles, much of the activity driving the office market is at the top end of the market, for spaces larger than 100,000 square feet. Since January, there have been nine leases signed larger than 100,000 square feet. The trend continues this quarter following PwC’s decision to relocate its San Francisco offices into 200,000 square feet of state-of-the-art creative, collaborative space at 405 Howard Street in 2020. The global professional services firm now occupies 165,000 square feet of space at Three Embarcadero, where its lease expires in less than two years.
405 Howard Street is owned in partnership by TH Real Estate and Norges Bank Real Estate Management.
“The property, purchased in 2014, has performed extremely well since acquisition,” said Cindy Chen, Senior Director, West Coast Office Asset Management at TH Real Estate. “With improving market rents and conditions in the SoMa submarket, TH Real Estate is excited to have signed this lease with PwC.”
Christopher T. Roeder, Ted Davies and Tom Doupe of JLL represented ownership in negotiating the new lease. The team sees further deepening of some key trends in San Francisco’s office market as a result of the transaction.
“San Francisco is in the middle of a dramatic economic transformational shift that is having a major impact on the way people work, when they work and where they work,” says Chris Roeder, International Director, JLL. “Open collaborative space on large floor plates in prime office buildings such as 405 Howard Street is very much in demand and as PwC and others have shown, it is not solely technology companies that have the desire to lease such space,” he adds.
LEED and Location
TH Real Estate’s 405 Howard is Platinum LEED-certified and has one of the highest LEED scores of any building in the country. The building has high ceilings, floor-to-ceiling windows and large, flexible floor plates that maximize natural light, 100 percent fresh air intake and under-floor HVAC.
The building is also in a prime location just two blocks from the recently opened $2.26 billion Salesforce Transit Center, the city’s major regional transit hub and the site of a four-block long public park.
“The new transit center has been a tremendous catalyst for growth south of Market,” says Roeder. “Proximity, and ease of access, to as many forms of transportation as possible is a critical factor as companies make decisions about where to locate their businesses for the next 10 years or so,” he adds.
Large Blocks Now Limited
With strong overall leasing activity this year and companies consuming large blocks of space at a record pace in a city that closely regulates new office construction, it’s not surprising that supply is dwindling.
San Francisco actually has a healthy pipeline of new construction today with almost 4.7 million square feet of space underway. However, 71 percent of this space is pre-leased and only two projects are expected to deliver space in 2019.
This dynamic is only likely to push rents further into record high territory as tenants deal with an extremely limited supply of space over the next two to three years. Average annual asking rents reached $76.28 per square foot on a gross basis last quarter, the highest recorded in the city and placing the market on a par with New York, London, Tokyo and other long-established global cities.
JLL (NYSE: JLL) is a leading professional services firm that specializes in real estate and investment management. Our vision is to reimagine the world of real estate, creating rewarding opportunities and amazing spaces where people can achieve their ambitions. In doing so, we will build a better tomorrow for our clients, our people and our communities. JLL is a Fortune 500 company with nearly 300 corporate offices, operations in over 80 countries and a global workforce of 86,000 as of June 30, 2018. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com