The lowering vacancy rate is due to increased office leasing combined with a reduction in office supply due to the conversion of secondary office space to residential units, according to the report. "Combining the estimated absorption and reduction of office supply…, vacancy rates could dip below 10% in 2007," says Scott Harper, managing director for Colliers San Francisco office.

Accordingly, rental rates continued to rise in the fourth quarter. The citywide average effective rent for class A space is now $35.36 per sf per year as of the end of the year, up $4.20 from the end of September.

In the Financial District, vacancy at the end of the year stood at 12.7%, down from 13.8% at the end of September and 15.4% at the end of 2004. The average effective class A rent there jumped $3.16 during the fourth quarter and now stands at $35.61 per sf per year, according to the report.