Frisco Office Vacancy Continues to Fall

SAN FRANCISCO-Overall office vacancy here continued to drop through the first three months of the year, its third consecutive quarter of improvement, according to the latest report from the local office of Grubb & Ellis. Including available sublease space, vacancy in the 63-million-sf San Francisco market fell from 23.4% at the end of the year to 22.7% at the end of March, according to the report. Net absorption was positive at 178,400 sf. This time last year, citywide vacancy was 23.9%.In the 44.3-million-sf CBD, vacancy fell from 21.4% at the end of the year to 20.6% at the end of March on 377,000 sf of positive net absorption. The North Financial District gets the credit, as vacancy in the 25-million-sf submarket fell from 20.1% to 18.8% thanks to 342,000 sf of positive net absorption, while vacancy in the 19-million-sf South Financial District stood still at 23.1%. When looking only at trophy properties and view space, however, the vacancy rate drops to around 12% and 15%, respectively, says G&E regional research manager Colin Yasukochi.The 18.6-million-sf outside the CBD saw average vacancy fall from 28.1% at the start of the year to 27.6% at the end of March on about 200,000 sf of negative net absorption. The decrease occurred with only two of six submarkets actually experiencing a decline in vacancy. The best performance occurred in the 2.7-million-sf Yerba Buena submarket, where vacancy fell from 25.2% to 18.1% on 25,600 sf of positive net absorption. The worst first quarter performer was the 2.1-million-sf North Waterfront submarket, where vacancy rose from 20.6% to 23.5% thanks to 60,400 sf of negative net absorption. The submarket with the largest ongoing vacancy continues to be the six-million-sf South of Market area, where vacancy rose from 48.6% to 49.5% on 56,200 sf of negative net absorption.There are some cautionary notes that could temper the seemingly bullish mood for near-term recovery, warns Yasukochi. “Widely anticipated, but not yet arrived job growth is needed to sustain demand; there are pending net reductions of space among several large tenants, and; it’s unclear what impact rising interest rates will have on business activity,” he says. “Yet, generating significant positive momentum from mostly internal tenant movements and repositioning is a major, confidence-building step forward.” The aforementioned large tenants include Bank of America, Bechtel and Charles Schwab, says Yasukochi, adding, “Until signs of convincingly sustainable job growth appear, expect uneven market performance.”