San Francisco Office Sales Reaching New Price Highs

By Sharon Simonson

Calling the San Francisco commercial real estate market “a powerful brew,” one of the city’s best-connected property brokers told a city audience April 30 that two South of Market high rises are on tap to sell for $800 a foot while a third is due to close for more than $700 a foot.

“These are huge, huge prices,” Bill Cumbelich, a principal and founder of The CAC Group brokerage, told the 17th Annual Fisher Center Real Estate Conference.

The San Francisco office market is undergoing titanic change, Cumbelich said. The city, he proclaimed, “is becoming a suburb of Silicon Valley.”

For the first time in his more than 30 years of professional tenure in the city, the Mid-Market Street district, a historically hardscrabble area between 5th and 9th streets, has become an overflow beneficiary of robust office leasing. Tech tenants are also “scattering” to Showplace Square, the Potrero area and the Mission District, he said, where many tech workers live.

“It is a blossoming of the trends of the dot-com era,” Cumbelich said, with technology tenants accounting for 80 percent of the 25 largest leases completed so far in 2012.

Technology companies account for 20 percent of the occupied San Francisco office space and 50 percent of the tenants in the market looking for space, he said. That includes a current requirement in the market for up to 400,000 square feet from none other than Salesforce.com.

The cloud-based enterprise-software company earlier this year signed the largest lease in San Francisco in more than 10 years, according to CBRE Inc., a 400,000-square-foot lease at 50 Fremont St.

Tishman Speyer’s 555 Mission St. building is expected to sell for “right at” $800 a square foot, Cumbelich said. The more than 556,000-square-foot, 33-story tower was completed in the fall of 2008 and is San Francisco’s first LEED Gold office tower, according to the Tishman Web site.

Meanwhile, 400 Howard St., also known as Foundry Square I, “is due to close at $730 a square foot, Cumbelich said, and 500 Howard St., known as Foundry Square IV, will close at “over $800 a foot.”

The 335,000-square-foot Foundry Square I is owned by New York City-based AREA Property Partners and is leased to BlackRock Inc., a New York City-based financial services company. The current lease runs for another 10 years. AREA is listed as one of Cumbelich’s clients on his company’s Web site.

Foundry Square IV, with 225,000 square feet, is leased to Oracle Corp. and subleased to Gymboree Corp., a children’s clothing retailer. It is controlled by Cottonwood Partners Management Ltd., a Salt Lake City property investment, management and development company.

Cumbelich traced the recent history of rents and investment sales in the city to illustrate the current complexion of the San Francisco office market. Rents peaked in the central business district at $51 a foot a year in the 2007 and 2008 timeframe, before the financial markets crash. They are now $3.50 a foot lower. Meanwhile, in the South of Market district, outside the CBD, rents peaked in the last cycle at $41.50 a square foot a year. They are now $51.50 a foot, he said.

In 2010, the high sale—with one notable exception—was RREEF LLC’s disposition of the 770,000-square-foot Market Center at 555-575 Market St. for $350 a square foot to Manulife Financial Corp., he said.

The high sale last year was the $460 a square foot acquisition of China Basin Landing by a JPMorgan Chase & Co. core real estate fund.

Those sales are now being followed by the Foundry Square transactions and the Mission Street sale by Tishman Speyer.

Notable buyers include out-of-town companies such as Manulife and Southern California’s Kilroy Realty Corp. and Hudson Pacific Properties Inc. Still, San Francisco-based Shorenstein Properties LLC has purchased 1.2 million square feet so far in this cycle, he said.

West Coast Commercial Real Estate News