By Jon Peterson
Land prices for office building development sites in San Francisco are nearing the peak, according to data supplied by the San Francisco office of CBRE. Land prices are now approaching $170 per square foot. This would put in close to the $181 per square foot price for land that occurred in 2007.[contextly_sidebar id=”f18213ce700b25635179b966b3dbfff3″]“The reason this is happening is due to the tenant demand for space, the continued rise in rental rates and the low vacancy that currently exists for office space in San Francisco. These factors allow for the land prices to rise and still make the office development projects economically feasible,” says Colin Yasukochi, director of research and analysis for CBRE in its San Francisco office.
The $170 per square foot land price point is what Alexandria Real Estate Equities reportedly had paid for the development site at 500 Townsend Street. This is where a 300,000 square foot project could be development in the future.
The feeling is that this situation will not be changing anytime in the near future. “It’s our expectation that this current market scenario will continue in the foreseeable future,” said Yasukochi.
Rental rates for office buildings in San Francisco are a good example of this. “Rents for Class A office space in San Francisco are now at $60 per square foot, full service. Our projection is that these rents will increase by 10 percent to 15 percent this year. This would put the rental rates at the high $60s per square foot by the end of the year,” said Yasukochi.
The overall vacancy for office space in San Francisco remains at a low level. CBRE puts this at 7.2 percent for the first quarter of this year.
Another indicator of the strong demand for office development sites in San Francisco is the scenario of pricing for land sites that are entitled and non-entitled. “In a normal market situation, there would be a difference in a price point for sites that are entitled and those that are not. Right now in San Francisco there is very little difference in price for these two kinds of sites. I think this shows how strong the investor demand is for office sites in the city,” said Yasukochi.
All the demand for the sites does not insure that all of these projects will be developed in a timely manner. There is a significant backlog of projects getting approved as of February of this year.
The Proposition M that exists in San Francisco allows for 2.7 million square feet of office projects to be approved on an annual basis. In October of each year another 875,000 square feet is added this figure. There are 500,000 square feet of projects that are waiting to be approved. There is another 8 million square feet of projects that are in the pre-approval process.