By Derek Daniels, Senior Research Analyst, San Francisco
Optimistic Outlook for 2017
The unemployment rate in the San Francisco metropolitan division (San Francisco and San Mateo counties) was 3.0% in November, down from a revised 3.2% in October, and below the 3.3% reported one year ago. Total private sector jobs reached a new high in November (973,000 positions) with +2.6% growth year-over-year while office using positions climbed +2.3% annually to 415,200.
The San Francisco office market was on the hunt for equilibrium during the course of 2016 as the vacancy rate ticked up and asking rents, while higher, were well off the torrid pace of the past few years.
Moving through 2017, companies should benefit from new policy stimulus likely to be put in place. There may be headwinds due to rising interest rates (which we have already considered in our forecast model) along with potential protectionist policies.
Optimism now prevails for the 12 to 24 months ahead, as San Francisco remains one of the most important technology centers in the world and leasing fundamentals remain exceptionally strong. The Citywide overall vacancy rate closed the fourth quarter at 8.0%, a +30 basis point (BPS) increase from the third quarter. Even with that uptick, it remains below the 10.6% ten year average.
For the CBD (North and South Financial submarkets), the Class A direct vacancy rate climbed 80 BPS to 7.2%. North Financial vacancy increased 60 BPS to 9.3% while South Financial remained substantially lower at 5.3%.
The Citywide overall asking rent increased +$0.56 per square foot (PSF) or +0.8% to a record high of $69.77 PSF in the fourth quarter after a slight -0.1% dip in the third quarter. It has remained above the previous record peak of $66.00 PSF (in the fourth quarter of 2000) for six straight quarters. The CBD Class A direct average asking rent declined -$0.36 PSF or -0.5% in the fourth quarter to $74.13 PSF.
Both North Financial and South Financial recorded slight declines over the last three months of 2016. Demand has increased in the 4th quarter, as our active tenants in the market list grew to 6.2 MSF in Q4 from a low of 3.6 MSF in the summer.
Construction & Development There were no building deliveries in the fourth quarter, however, 2016 was a significant year with a total of 1.5 million square feet (MSF) in new construction completions. The new inventory was 96.3% leased at the time of delivery with the only building to deliver vacant (500 Pine Street), now fully leased to Blend Labs in the fourth quarter.
2017 is expected to be a significant year as 3.0 MSF of office space is scheduled for completion which will push the San Francisco inventory above 80.0 MSF for the first time in its history. As of the fourth quarter of 2016, 1.2 MSF (38.0%) of this inventory was pre-leased. The majority of new deliveries will be concentrated in the CBD with a total of 2.2 MSF delivering: Salesforce Tower, 181 Fremont Street, and 350 Bush Street. There are five potential deliveries scheduled to complete in 2018, totaling 1.8 MSF.
Leasing Activity & Absorption
New leasing activity totaled 1.3 MSF in in the fourth quarter, pushing year-end total activity to 6.1 MSF. The total for 2016 is just under the 6.3 MSF in 2015 as well as the ten-year annual average of 6.4 MSF.
There were several large deals signed in the fourth quarter with two in excess of 100,000 square feet (Adobe at 100 Hooper Street for 210,000 SF and the NerdWallet sublease from Twitter at One Tenth Street for 105,000 SF).
Overall net absorption totaled -335,000 SF in the fourth quarter, with the year-end total remaining in the black at +561,000 SF. The other three quarters of 2016 all posted positive absorption. A combined lack of significant move-ins along with space moving from “marketing” to “vacant” pulled the number into the red. Fully leased new construction deliveries in previous quarters boosted net absorption into positive territory for the year.
Sublease vacancy remained essentially unchanged since mid-year at 1.5 MSF. The more forward-looking metric of sublease availability (all space being marketed whether vacant or occupied) pulled back for the third quarter in a row, falling -14.7% to 1.9 MSF, only 300,000 SF above the 10-year quarterly historical average.
Sublease space now accounts for approximately 14.5% of all 13.2 MSF of available space in San Francisco. The largest new sublease availabilities to hit the market in Q4 were NerdWallet’s 51,000 SF at 901 Market Street (relocating to the aforementioned One Tenth Street), Silicon Valley Bank’s 35,000 SF at 555 Mission Street and FinancialForce’s 30,000 SF at 595 Market Street.
Cushman & Wakefield tracked nine sales in the fourth quarter totaling $2.2 billion, and we expect four more sales totaling $700 million to close by the end of January. Even with rents moderating and interest rates moving, pricing continues to increase and is now at an all-time high, reaching beyond $800 PSF.
Total transaction activity for the year was $5.4 billion, making 2016 the third highest total dollar volume the city has experienced in its history.
Derek Daniels is a Senior Research Analyst with Cushman & Wakefield, based in the heart of San Francisco’s booming Financial District.
With nearly a decade of eclectic research experience in the Bay Area commercial real estate market, his resume includes a wide variety of work ranging from local market research to advising tenants and landlords in the lease and sale of office and industrial space.
Derek’s background includes working as a Research Analyst for commercial real estate company Colliers International. He also worked previously as an Associate Broker for NAI BT Commercial, where he specialized in the lease and sale of office and industrial space in the East Bay.
Among other responsibilities, Derek’s research work focuses on publishing quarterly market beat reports, assisting brokers with statistical analysis and writing research collateral. As an avid social media participant, Derek is an active commercial real estate guest blogger.