• San Francisco

Northern California Office Market Insight

Robert Sammons, Senior Director, Northern California Research
Erik Hallgrimson, CCIM, Executive Managing Director

This article originally appeared in the September issue of Western Real Estate Business.

The economic expansion continues across the U.S., now the second longest since World War II. With tech companies driving this cycle, it is no surprise the Bay Area (deemed the “tech capital of the world”) would be front and center. From the more traditional tech companies across Silicon Valley to life sciences along the Peninsula to start-ups in San Francisco, the entire region has expanded exponentially since early 2010. There have been ebbs and flows to the boom, including difficulty in VC financing during 2016 for some start-ups that were spending a bit too fast and furious, but that issue has for the most part receded with “big tech” now leading the charge in absorbing large blocks of space.

In San Francisco proper, over the past 18 months any office building under construction or completed has leased, leading to a dearth of space today and likely into the early 2020s. Constrained supply has led to record high asking and effective rents, instigating a move from San Francisco by a number of non-profits and professional services firms to other office locations in the Bay Area–generally the East Bay (Oakland). While tech start-ups and big tech are not immune to higher rents, it has proven necessary for them to maintain a significant presence here because of the deep talent base, among other factors. Exacerbating the supply issue is the fact there will be a lack of new office deliveries until at least 2022 due to a variety of factors including Prop M (limiting the square footage allocated per year to office development) plus the slow process of upzoning Central SoMa (which will allow for large office projects to proceed though still capped under Prop M).

San Francisco’s ongoing tightness may create more opportunity for the East Bay – particularly the Oakland CBD – to syphon some activity thanks to approximately 2 million square feet of new projects potentially delivering over the next few years. Housing is also booming in and around Oakland and, with two BART stations in the CBD within a 15 minute ride of downtown San Francisco, the area has already begun to reel in numerous nonprofit and professional services tenants. It should only be a matter of time before a major tech company signs a big deal in this market.

Meanwhile, activity has hardly come to a stand-still along the Peninsula. Life sciences rules the roost with tenants of all sizes grabbing space where they can. Older office buildings in many cases are being converted or torn down and replaced with life science-capable properties heavy with lab space. Much of the activity has taken place in South San Francisco although there are patches of activity further south. As in the East Bay with BART, any project within walking or biking distance to Caltrain has shown superior performance, especially if in a mixed-use area providing abundant amenities nearby.

In Silicon Valley the big tech players are generally taking down large blocks of space upon new construction delivery. And as the more suburban cities across the valley continue to thrive, downtown San Jose has begun to rise as a key focal destination as it serves as the South Bay’s primary transit hub, with Amtrak, Caltrain, VTA, and in the early part of the next decade BART all offering connectivity here. It is anticipated downtown will see several major office developments, including mixed-use, in coming years throughout its core and close to Diridon Station and the future BART station on Santa Clara Street to accommodate tech demand. Downtown’s office base is expected to grow by 50% to as much as 75% in the next 10 years, with many enterprise tenants having their interest piqued by the transit and housing options here. There are billions of dollars chasing property in downtown, which will hopefully result in a renaissance for the entire city of San Jose.

No expansion is without issue, and the Bay Area’s robust expansion has certainly brought upon areas of concern; the biggest being the steep cost-of-living, primarily housing costs. While the region has begun to build significant new housing stock, it still has a lot of catching up to do—not to mention much of the new housing is on the upper end of the scale. Traffic and transit have also suffered although funding in these areas is climbing. If progress can be made on these twin burdens, the boom (albeit with some bumps in the road) may have a clearer path to continue.

  • San Francisco

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