Solid Fundamentals but Tremors Underfoot?
The metropolitan division of San Francisco (San Francisco and San Mateo counties) began 2016 essentially at full employment. Total private sector positions closed February at 939,900, up by 37,700 or 4.2% year-over-year. Office using positions have increased 6.0% since February 2015 to 403,300.
The subsector of computer systems led the way, rising by 13.2% to 69,600. Financial activities increased 2.1% to 73,400, while information saw a healthy increase of 5.0% to 60,500. Standouts from the non-office using employment side included construction (up 11.9%) and retail trade (up 3.0%). Other Services which includes many non-profits saw jobs fall 1.3% over the past year.
From a high level, fundamentals in the first quarter of 2016 appeared to continue in the same trajectory as previous quarters; declining vacancy, increasing rents (albeit at a slower rate), and positive absorption. Several factors are influencing the market and pointing to a cooling in the next 12 months: primarily over-blown valuations in the tech industry and a soaring cost of living. New sublease space has been hitting the market at an increasing level with more than half of that space originating from tech tenants. Furthermore, almost half of that new sublease space is due to tenants contracting or consolidating.
Asking Rents at Record High
Citywide, the overall asking rent closed Q1 16 at a record high of $68.44 per square foot (psf). However, not all submarkets fared the same, as the class A overall CBD asking rent actually decreased 0.9% to $70.64 psf. This marks the first quarterly decrease since Q2 10. Citywide overall vacancy fell to 5.7%, declining 20 basis points (bps) over the quarter and finished well below the 6.4% reported at Q1 15.
CBD Vacancy Rate
CBD vacancy landed at 6.5%, down from the 6.8% reported in Q4 15 and down from the 7.5% reported in Q1 15. Non-CBD vacancy remained flat at 4.1%. Class A direct CBD vacancy completed the quarter at 5.6%, a 140 bps decline over the past year. The North Financial class A submarket recorded the highest negative net absorption: 141,955 square feet (sf) with 101 California Street the largest contributor of new space. Class A rents in that submarket fell for the first time since Q3 12, dipping 3.1% to $70.05 psf.
There was one new office building completed in Q1 2016 – Tishman Speyer’s 450,000 sf class A building at 222 Second Street in the South Financial submarket with LinkedIn occupying the entire building. It was the first new building delivery Citywide since 2014. As of the end of the quarter there was 4.4 million square feet (msf) of space under construction Citywide of which 52% is pre-leased. Several projects have pushed completion dates into the second quarter of 2016, including Dropbox and Splunk’s new buildings on Brannan Street, and the fully available speculative office building at 500 Pine Street.
New Leasing Activity
New leasing activity totaled 1.1 msf in the first quarter, down from 2.2 msf recorded in Q1 15. The significant leases signed during the quarter were from diverse industries although the top three were all tech firms. The largest transaction of the quarter was the signing of Airbnb’s new headquarters at 999 Brannan Street in the Showplace Square/Potrero Hill submarket. They leased the
150,000 sf building previously occupied by Dolby Laboratories.
Dolby purchased the property in 1998 and remains the landlord.Quantcast signed a long term lease totaling 95,000 sf at 795 Folsom Street in Yerba Buena. Twilio leased 92,000 sf at 375 Beale with that project now 96% leased. At 600 California Street,
WeWork leased 73,000 sf, taking floors 11-17. Last but not least, Bain & Company pre-leased 70,000 sf at Salesforce Tower for occupancy in 2017/2018, in what will be a relocation out of 84,000 sf at Embarcadero Center. At the close of Q1 16, active tenant requirements amounted to 4.6 msf, down from the 6.5 msf reported in Q1 15.
Sales Activity
2016 is poised to be a record year for investment office sales.
Three sales closed in Q1, totaling 597,000 sf and $384 MM. JP Morgan Asset Management purchased the 312,000 sf class A office building at 580 California Street from LaSalle Investment Management. Madison International Realty purchased a partial interest in 550 Kearny, a 196,000 sf class B property in the North Financial submarket. And in February, Bridgeton Holdings purchased 995 Market Street, a 91,000 sf building from Long Market Capital Partners. It was recently announced that Pembroke Real Estate was selected as the buyer for 140 New Montgomery Street, which is rumored to be trading close to a record price per foot for San Francisco.
The post Marketbeat Office Snapshot – Q1, 2016 – San Francisco appeared first on Cushman & Wakefield Blog.