SAN FRANCISCO—The city has the third most expensive skyline in the country (by annual average rent per square foot), Oakland is the eighth most expensive and San Jose isn't far behind. Even so, a wide range of companies continue to lease space in these signature assets for the cache and views. And, some tech companies are migrating from brick and timber buildings in neighborhoods such as SOMA to newly upgraded and polished spaces in traditional downtown office towers.
JLL's Christopher T. Roeder sees San Francisco's skyline continuing to benefit from strong demand for quality office space with access to amenities and transportation, especially from homegrown/new age headquarters companies and large technology companies expanding from Silicon Valley. Roeder says that although the high cost of living, the need for more infrastructure and a tight labor market are the city's biggest hurdles, there's a bright spot in its all-important transportation infrastructure. With the Transbay Transit Center now well underway and new skyline-defining developments such as Park Tower due for completion in 2018, employers will have transit-friendly space options in the city in the next 18 to 24 months. Buyers, on the hunt for quality assets and higher investment returns, are exploring all three major metros with San Jose attracting value add and opportunistic investors seeking to tap into its downtown transit-oriented resurgence.
The look at downtown office markets was encapsulated in JLL's 2017 Skyline Report, which probed select groups of class-A office buildings in 57 major office markets around the country. The report shows that an expanding economy, eight years of office occupancy growth and a boomerang back to coveted skyline space by creative firms contributed to record rents and a landlord-friendly market in the first quarter 2017. San Francisco trails only New York ($87.90 per square foot) and Washington, DC ($83.09 per square foot) as the most expensive skyline in the country. Oakland is bested by those and Boston ($62.13 per square foot), Century City, CA ($58.92 per square foot), Austin ($58.81 per square foot) and Stamford, CT ($54.55 per square foot).
Many Bay Area tenants still want that skyline cache, which is why rents continued upward in San Francisco and Oakland, albeit at a slower rate, even with little net new space being absorbed in the first quarter. San Francisco's annual average rent was $76.11 per square foot in the first quarter of this year. Its East Bay counterpart, Oakland, has a business resurgence underway that has resulted in annual average rents of $54.00 per square foot. Meanwhile, three successive years of rent growth averaging more than 16% a year have pushed skyline buildings in San Jose to the cusp of the top 10 nationally with rents of $45.96, says the report.
Skyline vacancy within all three Bay Area markets is below the national average of 12.9%. Oakland leads the way at 4.9% direct vacancy. San Francisco's direct vacancy sits at 8.5% while San Jose/Silicon Valley is at 12.4%, according to JLL.
“San Francisco is especially in demand among companies seeking millennial talent because the city is where most Bay Area millennials want to live, work and play–you just have to look at the crowds in the Presidio, the Marina or any of our city parks on the weekend to see that,” Roeder tells GlobeSt.com. “We have become a true 24-hour city, like New York, with talent continuing to congregate here and that ultimately attracts employers.”
San Francisco's skyline keeps expanding (currently at 54 buildings) while Oakland and San Jose's have remained stable. Just less than 4 million square feet of new skyline product is under construction in San Francisco while the first construction in Oakland for several years began in the first quarter. A single 120,000- square-foot project is underway on San Jose's skyline.
The net change absorption slowed in San Francisco in the first quarter but this follows the city's second best year of skyline office absorption since 2005 (1.12 million square feet). Oakland's skyline market also took a breath from a hectic pace of leasing. The opening up of a few large block spaces should provide tenants with a few more options in what has become a very tight market. Silicon Valley had its best net absorption of skyline office space since 2015.
“Traditionally law firms, financial institutions and other professional services groups were the main drivers of leasing activity within skyline buildings,” said Susan Persin, research director, JLL. “Today, a lack of creative space in more unique and eclectic neighborhoods is drawing TAMI companies (technology, advertising, media and information) and other venture capital-backed firms into more traditional business districts and high-rise office buildings around the Bay.”
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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.
