2016 was a surprisingly resilient year for Bay Area real estate and the market fundamentals proved strong enough to weather a number of economic and political headwinds. A dearth of IPO’s for technology firms, soaring and seemingly unsustainable valuations and a retreat from globalism and the post WWII democratic order all could have derailed several years of growth. It’s a testament to the strength of the Bay Area economy that they didn’t. Vacancy ticked up from 5.9% at the end of 2015 to 8.0% at the end of 2016, and average SF rents showed modest growth from $68.14 per square foot to $69.77 psf.
“ Below are 5 things I’ll be watching in 2017. While a lot of this analysis focuses on where potential cracks are in the market, my sentiment is that the Bay Area will show continued economic resilience, growth and innovation in 2017. “
1. Leasing Progress in New High-Rises: In 2017, 3.4 million square feet of new office space will be completed, the largest amount of space to be delivered in one year since the late 1980’s. These new buildings will increase the building base in San Francisco to 81 million square feet, or roughly a 4.3% expansion in total supply. High-profile projects include the Salesforce Tower (58% leased to Salesforce and a few smaller companies), 181 Fremont (no pre-leasing) and 350 Bush (50% leased to Amazon’s Twitch division). Between these 3 buildings and Kilroy’s Exchange in Mission Bay, there’s potentially 2 million square feet of as-yet unleased space being delivered this year. All else being equal, these spaces could push the city’s vacancy rate over 10%.
The rate at which these buildings lease up is critical to the market’s health, but just as important is who leases the space and where they’re moving from. If it’s expanding tech companies or new players to San Francisco, rents should hold firm. If these new high-rises cannibalize tenants from other buildings with no absorption, rents should edge downward.
2. Expanding Tech Companies and New Entrants to S.F: Last year’s major uptick in sublease space was counterbalanced by a number of rapidly growing technology companies. Twilio, Adobe, NerdWallet, AirBnB and many others all signed leases for major expansions. If Slack’s recent expansion into 240,000 sf at 500 Howard is a bellwether of things to come this market should hold up well; if it’s an outlier there could be lean times ahead.
“ San Francisco has benefitted mightily from companies like Google, LinkedIn and Amazon establishing significant footholds here. That trend has cooled some recently, but if Facebook and other Silicon Valley stalwarts decide to establish a larger San Francisco presence that would be a boon for the market. “
3. Sublease Space and Tech Layoffs: My instinct is we’ll see sublease space come available at a similar rate to last year; the aforementioned expanding tech companies will determine how much of an affect that has on the market. Large blocks of sublease still haven’t been that prevalent and have moved quickly after hitting the market. Pfizer just put 150,000 sf of sublease space on the market after their Medivation acquisition, and we’ll be watching closely for more subleases and the rate at which they turn over. In 2016 most subleases were taken by expanding tech companies, which led to rents holding steady rather than decreasing.
4. Established Companies Fleeing the City: Despite the high cost of working and living in San Francisco, established companies relocating out of town have been the exception rather than the rule. San Francisco stalwarts like Schwab, The Gap and Wells Fargo have continued to maintain a large presence here; Schwab recently renewed their 435,000sf lease at 211 Main. With rents, salaries and the cost-of-living amongst the highest in the nation, more established companies will continue to evaluate whether San Francisco is the best place for them.
“ McKesson and Union Bank, both of which have deep roots in SF, are selling company-owned high-rises and likely relocating many jobs to less expensive pastures. Many others are evaluating their need to be here, and those decisions could push even more space on to the market. “
5. Trade Wars: Those of us who paid attention in economics know that tariffs and trade wars could eliminate some jobs and may have an adverse effect on consumers – simply put, tariffs are a tax that push prices up and cause demand to drop. Our new administration’s sabre rattling about tariffs and protectionism has focused on 2 of the USA’s 3 largest trading partners – Mexico & China (buyers of 23% of total U.S. exports), who are also deeply involved in manufacturing on behalf of American companies. Hitting China & Mexico with tariffs could result in them retaliating with tariffs on us, which means higher prices for U.S. consumers and lower demand for U.S. exports.
“ Additionally, California and the tech industry are heavily dependent on trade with China, with California a close second only to the state of Washington as an exporter of goods to China (California exported $13.8+ billion of goods to China in 2015). Companies like Apple, Tesla, Nvidia, major chipmakers and a bevy of others are deeply dependent on a good trading relationship with China. “
Here’s to a productive 2017.
Guest Blogger Eli Ceryak is a Senior Vice President and commercial broker for Cushman & Wakefield San Francisco. He represents a broad and eclectic client base, ranging from startup growth-stage tech companies to established Fortune 500 firms.
Eli earned his undergraduate degree from Harvard University and received his Masters of Business Administration from the Walter A. Haas School of Business at University of California Berkeley. He is a regular guest blogger on blog.cushwake.com and has been published in Business Insider and Bisnow SF.
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