Report: Vacancy, Rates Falling in Office Market

SAN FRANCISCO-The local office market continued its recovery through the second three months of the year. The citywide overall office vacancy decreased to 20.5% in the second three months of the year, down from 21.4% at the end of March and down from the all-time high of 22.9% that occurred this time last year, according to the latest market report from Cushman & Wakefield, which predicts that the momentum will carry through the rest of the year.Some of this drop in vacancy is due to buildings removed from the inventory, according to the report. Examples include Macromedia’s headquarters purchase of 601 and 625 Townsend and the residential conversion of the former Armory Building at 1800 Mission. In the CBD, class A direct vacancy actually rose slightly, from 14.6% to 15%. Direct vacancy in Class A space south of Market Street rose from 15.1% to 15.3%, while, north-of-Market vacancy rose from 14.2% to 14.8% during the quarter, according to the report. Vacancy in non-CBD class A space fell from 24.4% to 21.3%, according to the report. Including sublease space, class A vacancy in the north of Market CBD was 20% at the end of June, up from 19.4% at the end of March, while class A vacancy in the south of Market CBD fell from 19.3% to 18.5%.Overall sublease space decreased by 500,000 sf during the second quarter, from 3.8 million at the end of March to 3.3 million sf at the end of June. One year ago, sublease space totaled 5.1 million sf. Most of the reduction during this latest quarter is attributable to master leases expiring and being marketed as direct space, according to the report. However, several sizeable sublease transactions also helped. At 560 Mission, for example, Ernst & Young inked a 64,953-sf sublease and Munger Tolles & Olson’s signed a 41,746-sf sublease. Citywide leasing activity registered 1.7 million sf during the second quarter and stands at 3.7 million sf YTD. If the pace continues, activity would surpass 2003′s total of 5.9 million sf. Most leasing activity has been driven by relocations and “blend & extend” transactions, according to the report. The largest deal YTD is Deloitte & Touche’s 285,000-sf renewal at 50 Fremont. However, the majority of leasing activity occurred in spaces 5,000 sf or less. The smaller leases have accounted for 61.5% of YTD activity in the CBD. Overall absorption registered 289,281 sf during the second quarter and stands at 810,718 sf year-to-date. The CBD registered negative absorption totaling 68,870 sf during the second quarter but on the year still accounts for 69% of the overall absorption, according to the report.Contributing to the overall net absorption figures are tenants migrating to the city due to favorable lease rates. Such migrations accounted for 238,098 sf of YTD absorption. Expansions of existing tenants also made anb impact, accounting for 253,627 sf of YTD absorption, with law firms representing an impressive 41.1% of this total, according to the report. In the CBD, net absorption was negative at 78,661 sf, which is down from about 313,000 sf in the second quarter of 2003.Rental rates, meanwhile, remained flat in most submarkets, which could be seen as a sign of stabilization, according to the report. The CBD direct Class A rental rate decreased slightly by 0.8% over last quarter, from $30.84 per sf to $30.60 per sf, while the CBD direct Class B rental rate dropped from $24.00 per sf to $23.88 per sf over the same period. Joe Cook, head of Cushman & Wakefield Northern California, did not return a phone call seeking further comment.