SAN FRANCISCO—The recent deluge coming from the sky is not the only bursting spigot in the region. A surging tech economy, an effective unemployment rate of zero during 2015, some of the highest rates of leasing and pre-leasing ever recorded, a pipeline of under-construction projects so robust it's near bursting, and continued strong investment sales are telegraphing to many market watchers that 2016 could be the most prolific and productive 12-month cycle in the history of San Francisco's office market. This prediction is shared by many, including Colliers International, which has released its year-end office market research report.
Alan Collenette, Colliers regional executive managing partner tells GlobeSt.com: "As I mentioned, the distillation from all of our research tells us that 'this time it really is different.' The companies in San Francisco have a pressure release valve for their office space, being a combination of Oakland and new construction in San Francisco (courtesy of Proposition M), but it is generally impossible for those companies to leave the Bay Area."
The Glittering Age that Collenette often mentions has resulted in office rents being much higher in San Francisco than they are in Manhattan and vacancies are much lower at 7.2% for San Francisco versus 9.6% in Manhattan. Additionally, unemployment in the Bay Area is 5% or less, a number that effectively equates to zero, according to the UCLA Anderson School of Management's latest survey. In San Francisco, the rate was even lower at 4%, according to the latest report from the Bureau of Labor Statistics. Anyone who wants to work can work in the Bay Area, according to Colliers' study.
"Names like Twitter, Google, UBER, Airbnb, Salesforce and LinkedIn are the major engines of the world economy, and a part of why San Francisco is built to last but 15 years ago they did not exist, or, if they did, they were fledglings. That is why rents are higher than Manhattan for the first time in history and vacancy is much lower," Collenette continues to tell GlobeSt.com. "The fact that we have eclipsed Manhattan with the highest priced office rents in the nation, is neither lost on me, nor on any of our clients, who know that to be part of the new knowledge-based economy, to be at the so-called 'center of the universe,' they want, need and have to be here."
Reflecting Collenette's statement, according to the Colliers report, overall vacancy levels in the fourth quarter stood at a low 7.2%, rising higher than the 6.1% recorded in the third quarter, but were skewed due to the completion of four major pre-leased but not-yet-occupied office properties coming on the market. Those four buildings–350 Mission Street, 222 Second Street, 333 Brannan Street and 345 Brannan Street–delivered more than 1.2 million new square feet to the market and are expected to be occupied in the first half of 2016, which will then force the vacancy levels back to the 7% or lower range, which for most major metropolitan areas is effectively a net-zero vacancy rate. When that happens, the market will tighten its ranking as one of the strongest in the nation, the report noted, and will be far below the "10% tipping point" that would signal a balanced market.
Absorption rates totaled a healthy 179,736 square feet in the fourth quarter, the 22nd consecutive three-month period of positive net absorption. For the 12-month period ending December 31, 2015, total absorption for the year was a healthy 1.5 million square feet. What this does not indicate is the amount of space brought to market that was pre-leased but not yet occupied and the amount of new space that is in the pipeline for delivery in 2016, including some 637,000 square feet slated for delivery in the first quarter. Overall, there is nearly a total of 5 million square feet now under construction with 36% of that pre-leased, Collenette said.
While overall weighted rental rates for class-A assets reflected an increase for the quarter, annualized rents are up 11.8%, says Colliers. Leasing activity continued to be strong during the fourth quarter with nearly 1.2 million square feet of gross leasing volume. Prices continue to rise for both class-A and class-B assets. Class-A prices rose to $675 per square foot in 2015 compared to $615 one year ago. Class B prices per square foot also rose to $573 in 2015, compared to $508 in 2014.
As previously reported, the frenetic pace of market activity in the innovation-rich Bay Area shows no signs of slowing down.
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Lisa Brown
Lisa Brown is an editor for the south and west regions of GlobeSt.com. She has 25-plus years of real estate experience, with a regional PR role at Grubb & Ellis and a national communications position at MMI. Brown also spent 10 years as executive director at NAIOP San Francisco Bay Area chapter, where she led the organization to achieving its first national award honors and recognition on Capitol Hill. She has written extensively on commercial real estate topics and edited numerous pieces on the subject.
