Options Expand Slightly for Bay Area Office Tenants in Cooled Market

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

By Jacob Bourne

“Across the Bay Area we have seen the market become stabilized and resilient in terms of demand,” said Colin Yasukochi, director of research and analysis, CBRE. “The market hasn’t increased at the rapid pace as in years past. Tenants also have more flexibility than they had a year ago. With the new supply, landlords are more willing to negotiate. It’s still a landlord’s market, but it has shifted a bit more towards tenants.”

Recent Q1 2017 office data from CBRE shows vacancy rates across the region averaging 7.2 percent. The firm’s numbers for San Francisco are a bit lower at 6.4 percent. Cushman & Wakefield forecasted a continued rise in vacancy for the city over the next year on top of an increase to 8.7 percent up from 5.7 percent in Q1 2016. Although CBRE’s net absorption number for San Francisco was a positive 73, 400 square feet, the value was significantly lower than Silicon Valley’s 419,100 square feet or the Peninsula’s 168,500 square feet. Data from other firms show San Francisco’s net absorption falling into negative territory at -553,000 square feet from Cushman & Wakefield and -670,000 from Mihalovich Partners.

Robert Sammons, regional director of Northwest U.S. research at Cushman & Wakefield, views the opening up of San Francisco’s market as favorable overall given how many tenants have been pushed out of the city due to the escalating rents of previous years. The current conditions give tenants more options in terms of where to locate and some can now opt to stay in San Francisco.

“Inventory is still being added so that has loosened things up a bit,” Sammons commented. “San Francisco seems to change on a dime. Venture capitalists started to pull back on funding and startups got wiser and cooled their growth plans — this began in earnest in 2016 and continued throughout last year.”

According to CBRE, about 19.4 million square feet of office is under construction in the Bay Area but that number is expected to fall after 2018 parallel to a decline in demand. With slowed economic growth and higher construction costs, developers have become progressively less willing to build on spec than they were two years ago. Oakland is the exception to this trend where increased demand and more competitive rents have dropped vacancy and created strong market conditions.

Sammons is unconcerned about present and near future market fluctuations but remains worried about the lack of affordable hosing and inadequate transit infrastructure that imperil the region. However, he said that the climate bodes well for many parts of Oakland with good transit access and growing mixed-use development and predicts a development boom ahead for San Jose’s Diridon Station.

Job growth slowed a bit in Silicon Valley largely due to M&A activity, however unemployment is still well below the national average. Cushman & Wakefield researchers anticipate Valley job growth to accelerate over the next year. Following poor net absorption during Q4 2016, Q1 came out at 614,000 square feet according to Cushman & Wakefield. CBRE reported the Valley’s vacancy at 7.5 percent. Data from Mihalovich Partners placed combined net absorption of Alameda and Contra Costa Counties at 94,000 square feet, and for San Mateo that number is 403,000 square feet.

Dan Mihalovich, founder and CEO of Mihalovich Partners thinks that the Bay Area’s market statistics over the last several quarters indicate declining demand, rising space availability and waning tolerance on the part of tenants to pay high rents. Yet, instead of prices coming down he’s seeing more free months of rent offered and other arrangements such as improvement allowances and moving expenses paid, which keep rental rates artificially inflated. However, he predicts a coming decline in rates and greater rewards for tenants.

“The statistics don’t lie — the bloom is off the rose,” expressed Mihalovich. “We’ve had four consecutive quarters of declining absorption of space. There’s 15 million square feet of space on the market in San Francisco with more coming online daily. The markets are still priced as though there’s no tomorrow. The positive impression of the market is because of brokerage companies catering to the landlord community.”

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