By Derek Daniels
Senior Research Analyst
San Francisco Market Closes 2015 on High Note
The metropolitan division of San Francisco (San Francisco and San Mateo counties) continued to rack up the jobs through the end of 2015. Total year-to-date private sector positions closed November at a record 952,800, up by 39,700 – or 4.3% year-over-year.
Office using positions recorded a new record high, climbing 5.9% since November 2014 to 407,100. To no one’s surprise, the subsector of computer systems led the way, rising by 16.4% to 71,600. Financial activities wasn’t exactly red hot but did manage to eke out a climb of 1.1% and now stands at 73,000. Standouts from the non-office using employment side included retail trade (up 7.3%) and construction (up 5.3%).
Seemingly contradicting the trend of many non-profits relocating out of San Francisco, “other services” which includes many of these organizations, saw jobs jump 6.4% over the past twelve months.
Q4 Asking Rents: $68.14 psf
Citywide, the overall asking rent closed Q4 at a record high of $68.14 per square foot (psf) surpassing the previous record set just last quarter. The class A overall CBD asking rent climbed to $71.30 psf, a new high in the current cycle. The submarket with the highest asking rent in San Francisco was East SOMA with an overall class A figure of $77.20 psf thanks to premium pricing for both direct and sublet space.
Citywide overall vacancy fell to 5.9%, the lowest point in over 15 years, the historic low being 1.3% recorded in Q2 2000. Class A direct CBD vacancy completed the quarter at 6.1%, a 160 basis point (bps) decline over the past year.
No New Construction
There were no new construction deliveries in the fourth quarter, as several projects have pushed completion dates into the first half of 2016. Nearly all of these new projects have been pre-leased. In the first quarter, Salesforce.com will occupy 444,000 square feet (sf) at 350 Mission Street, Dropbox will move into a total of 293,000 sf at 333 & 345 Brannan Street, and Splunk will take 182,000 sf at 270 Brannan Street.
In the second quarter, LinkedIn is scheduled to occupy 450,000 sf at 222 Second Street and Collective Health will move into 57,000 sf at 85 Bluxome Street. Of the 1.5 msf of new construction deliveries occurring in the first half of 2016, only 55,000 sf remains available for lease at 500 Pine Street in the North Financial submarket. In addition to this new construction there is also the total renovation of 375 Beale Street. This 530,000 sf building still has approximately 100,000 sf available for lease and will be complete in Q1 2016.
The fourth quarter was relatively slow for larger lease transactions. The largest transaction of the quarter was Stitch Fix’s 95,000 sf lease at One Montgomery Street. The tenant will initially occupy 39,000 sf over two floors and grow into the remainder of the space throughout 2016. As mentioned earlier Collective Health leased the newly developed 57,000 sf class A building at 85 Bluxome Street and will take occupancy in Q2 2016. This property is aiming to be one of the first ground up developments to attain the WELL Building Standard, focusing on human health and wellness.
Additionally, BBVA Compass leased 35,000 sf at 201 Mission Street and is scheduled to occupy in Q1 2016. There were six other transactions larger than 25,000 sf in Q4.
New leasing activity declined in the second half of the year, however existing tenant requirements of 5.2 msf point to continued strong activity in 2016. Nevertheless, this metric should be watched as tenants could adjust their space requirements due to rising rents along with diminished growth expectations. On a bright note, available sublease space which was steadily increasing throughout 2015 flattened in Q4 and now and stands at 729,770 sf, representing 16.4% of total available space.
Dropbox has a significant amount of occupied sublease space on the market that is scheduled to become vacant in Q2 however as with other premium sublease space, we believe this sublease will be backfilled quickly.
Investment sales activity picked up in Q4 with the sale of 333 Bush Street and 116 New Montgomery Street. Sales activity will remain strong in the near-term as several significant transactions are project to close and San Francisco maintains its position as one of the top three U.S. markets for office investment.
The San Francisco overall asking rent has now risen for 22 straight quarters and have reached record highs. If recent decreases in leasing activity uncover a sustained trend expect vacancy and rents to flatten. As of the end of Q4, however, economic indicators and active tenant demand point to continued decreases in vacancy, further rent growth, and positive absorption growth.
– The vacancy rate is projected to tighten in the near term as several large tenants take occupancy in the first half of 2016.
– The upcoming move-ins in East SOMA and South Financial will contribute to significant increases in absorption in Q1 and Q2.
– Economic indicators and strong tenant demand point to continued rent growth.