By Meghan Hall
The San Francisco Bay Area continues to lead the way in market fundamentals and growth, even as investment has slowed over the course of the last year. Between 2017 and 2018, Commercial Café, a real estate analytics tracker, tracked investment across California, analyzing seven California markets: the Bay Area, Inland Empire, Los Angeles, Orange County, Sacramento, San Diego and San Francisco. Ultimately, its report found that despite decreases in sales volume, the Bay Area remained one of the most stable of the office markets evaluated, posting growth despite a slowdown in the six other markets.
According to Commercial Café’s report, there were 333 office sales that closed in 2018 across the seven markets, totaling $20.3 billion. While a healthy number, Commercial Café notes that the total is 20 percent below the 2017 office investment total. All of the office markets — except for the Bay Area — saw a year-over-year decrease in office investment last year. The Bay Area, however, saw $1.8 million more in sales and 1.3 million square feet more of office space trade.
In its count, Commercial Café selected transactions with price tags equal to or larger than $5 million and buildings that were equal to or larger than 50,000 square feet.
The Bay Area was the top-ranked market when it came to California office sales in 2018, said Commercial Café, with almost $7 billion in office transactions. 87 sales closed, and the average price per square foot was $418.63. Only San Francisco proper, which commercial Café counted as a separate entity, posted a higher price per square foot, at $608.38. Overall, San Francisco was third among the markets studied, racking up almost $3.5. billion in sales volume spread across 38 sales. In, 2017, San Francisco posted nearly $4.5 in sales volume.
However, sales activity such as Google’s acquisition of the Britannia Shoreline Technology Park in Mountain View, Calif., for $11 billion in November 2018, solidified the greater Bay Area as California’s strongest market. Google bought the 12-acre property from Irvine, Calif.-based HCP after securing its status as the principal tenant of the park. The sale was the largest deal in California in 2018, and the third-largest office sale nationwide.
As a result, the Bay Area saw the highest year-over-year increase in prices, the most deals closed, the highest dollar volume and the most inventory changing ownership. Commercial Café’s data shows that office prices rose 28 percent, and the Bay Area office space that changed hands last year accounted for 29 percent of the total inventory sold across the seven California markets analyzed in the report.
San Francisco, like the other six markets analyzed in the report, saw sales volume decline. In 2018, the city saw close to 6 million square feet of office space trade, a 24 percent decline from 2017 levels. However, despite the decrease, San Francisco office prices still increased by five percent year-over-year, enough to make it the priciest market in California, thanks to transactions such as DivcoWest’s acquisition of a 32-story office tower at 301 Mission St. The investor, which partnered with CalSTRS, purchased the property from Vanbarton Group for $293 million, or around $923 per square foot.
The remaining markets analyzed in Commercial Café’s report also saw sales volume and investment drop from 2017 levels. The Orange County, Los Angeles and Inland Empire markets all saw office prices drop as well. Los Angeles still closed 85 deals in 2018, despite a 40 percent drop in activity, and 14,799,050 square feet of space traded hands, ranking second for 2018 California office sales. Orange County ranked fourth, with 43 sales covering just over 7.5 million square feet. However, both markets, as well as the Inland Empire, saw their price per square foot drop. While Orange County and Los Angeles saw price per square foot dip two percent and six percent, respectively, the Inland Empire saw its prices for office space drop 24 percent, said Commercial Café.
San Diego and Sacramento, the final two markets evaluated by the study, fared slightly better even though sales volume dipped. The two markets saw their prices for space increase 16 percent and 26 percent respectively. San Diego had 35 office properties trade for a total sales volume of close to $1.9 billion. Sacramento counted 27 sales, totaling $743 million.
With these fundamentals accounted for, the greater San Francisco Bay Area remains one of the strongest and most stable markets for office investment in California.