by Derek Daniels

banner for cushman 3rd quarter statsBandwidth of Tech Boom Powers SF Market
Employment in San Francisco and the greater metropolitan division (San Francisco and San Mateo counties) continued to break records in Q3 2015. Non-office sectors have certainly been on the rise, with leisure & hospitality up 5.2% and construction and manufacturing up 4.8%.

The real driver of the recent jobs boom, however, has been technology jobs, with computer systems design & related services (CSD) adding 12,200 positions or 20.9% year-over-year. In fact, CSD (70,500 positions) should overtake all of financial services (73,500 positions) in total job count by early 2016.

Asking Rents Jump 5.2%
The overall average asking rent for San Francisco jumped 5.2% in Q3 to close at a record high of $66.71 per square foot (psf), bypassing the previous record of $66.00 psf in Q4 2000. East SOMA took the crown for submarket with the highest asking rent at $69.94 psf, followed by the downtown core in the South Financial ($68.69 psf) and North Financial ($68.00 psf) districts.

The overall vacancy rate for San Francisco tumbled 40 basis points (bps) to 6.0%, its lowest figure since the 3.6% recorded in Q4 2000. Direct vacancy dropped significantly, from 4.0 million square feet (msf) to 3.6 msf. But sublease vacancy has climbed for four quarters in a row, hitting 954,943 square feet (sf), the highest since Q4 2010. Just over 71% of that sublease vacancy resides within the CBD (North Financial and South Financial). Net absorption citywide has been minimal for two straight quarters with the recent cause being additional sublease vacancy within the South Financial submarket along with new direct vacancy in East SOMA.

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The Fourth Quarter, 2015
There were no new office building deliveries in Q3. However, Q4 is expected to record a rather significant increase with the addition of six properties containing 1.4 msf of inventory. But don’t expect the vacancy rate to rise as 96% of that space has been pre-leased. The two largest deliveries will be 222 Second Street (LinkedIn) at 452,000 sf and 350 Mission Street (Salesforce) at 444,000 sf. Other buildings expected to wrap up construction include two for Dropbox at 333 and 345 Townsend Street and Splunk’s building at 270 Brannan Street.

The lone availability among the new deliveries expected in Q4 is the boutique property at 85 Bluxome Street with a total of 57,000 sf. Beyond those near term deliveries, there is another 7.1 million square feet under construction or entitled. Of that, approximately 22% has been pre-leased. Those projects should enter inventory between 2016 and 2019.

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In the Pipeline
There is then another 12.4 msf in the pipeline – either pending entitlement or proposed. But the San Francisco Prop M office building cap will complicate much of that development. Currently there is just 998,000 sf remaining in the office approval queue, though another 875,000 sf will be added in mid-October (and annually in mid-October thereafter). If job growth continues at a similar or even moderately comparable pace, the lack of inventory will become an even more significant concern for San Francisco.

Of course, that job growth statement above has been debated recently. Costs for both office and housing continue to rise across the Bay Area. In fact, just in the last month ride-share services Uber and Lyft, though remaining San Francisco-based companies are chauffeuring some employees to other geographies. Uber is driving across the Bay Bridge to Oakland and pulling up to the former Sears Building, while Lyft is taking a road trip and dropping employees off in Nashville and Seattle. Those might be pricey rides, but both companies feel it will be less expensive in the long run. However, office rents here are still much less expensive than many other global markets.  San Francisco prices, for instance, still remain significantly below that of Manhattan, and only slightly higher than Washington D.C.

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Investment activity picked up slightly in Q3 after a lull in the first half of the year. Foreign money continued to look for opportunities in San Francisco and was partially involved in several of the largest transactions including 888 Brannan Street which sold for $722 psf and 1355 Market Street which sold for $878 psf. Expect a further increase in activity in Q4 2015.

 

CHART 9 CUSHMAN