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SAN FRANCISCO-Competition to acquire stabilized core office assets in San Francisco's central business district has intensified over the past several years, according to Colin Yasukochi, director of research & analysis at CBRE, who recently chatted with GlobeSt.com about the market here. “That has caused cap rates to decline sharply to the 3.0% to 4.5% range or about 3.8% on average.”
According to Yasukochi, who recently also chatted with us about office vacancy here, That's the lowest range in the US, with Manhattan (4% to 5%) and Washington DC (4.75% to 5.75%) the next lowest, according to the recently completed CBRE Cap Rate survey. “A stabilized property generally has an occupancy level at or above the local average and is leased at market rents,” he says.
The dual effect of cap rate compression and large gains in rent and occupancy levels, according to Yasukochi, has pushed San Francisco sale prices up to an average of $640 per square foot. “Expectations for further property-level income growth based on strong tenant demand and landlord favorable market conditions in the foreseeable future, will keep investor demand robust,” he says. “These sale values are near and in some individual cases above replacement cost, which has spurred new development activity that is now financially viable and positioned to meet the demand from large office space users who have limited options in the existing market.”
Yasukochi also touched on office demand, as it relates to large blocks of space. His thoughts—similar to the opinion of the source we interviewed in a related story on the topic—were that office space demand from large tenants seeking 100,000 square feet or more current outstrips available supply. “Ten tenants are competing for eight available blocks of space over 100,000 square feet,” he says.
According to Yasukochi, this condition did not occur suddenly. “It took more than two years of sustainable demand by 23 tenants who leased such large blocks since 2011 to reduce available supply,” he says. “The current year is likely to be another strong year of leasing activity, with potential for 10 or more large lease transactions. Several under construction and pending construction projects are the likely candidates to accommodate these tenants.”
Large lease transactions, he says, are market moving and a lead indicator of how conditions could change. “If most of these transactions involve growth, as they do here in San Francisco, one should expect space conditions to tighten and rental rates to rise. The opposite is also true and the definition of large transactions will vary market-to-market.”
To learn more, please check out the charts below, and don't forget to post your own comments below about what you are seeing in the office market here.
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Natalie Dolce
Natalie Dolce, editor-in-chief of GlobeSt.com and GlobeSt. Real Estate Forum, is responsible for working with editorial staff, freelancers and senior management to help plan the overarching vision that encompasses GlobeSt.com, including short-term and long-term goals for the website, how content integrates through the company’s other product lines and the overall quality of content. Previously she served as national executive editor and editor of the West Coast region for GlobeSt.com and Real Estate Forum, and was responsible for coverage of news and information pertaining to that vital real estate region. Prior to moving out to the Southern California office, she was Northeast bureau chief, covering New York City for GlobeSt.com. Her background includes a stint at InStyle Magazine, and as managing editor with New York Press, an alternative weekly New York City paper. In her career, she has also covered a variety of beats for M magazine, Arthur Frommer's Budget Travel, FashionLedge.com, and Co-Ed magazine. Dolce has also freelanced for a number of publications, including MSNBC.com and Museums New York magazine.
