Demand-Driven Opportunism to Carry Market Through Year-End

SAN FRANCISCO—The Northern California office market posted 968,301 square feet of positive net absorption in the third quarter, according to Newmark Knight Frank. This marks the eighth consecutive quarter of positive absorption. Strong leasing activity, especially on quality transit-oriented spaces, continues to push down the overall availability rate, which finished the quarter at 10%, says the report.

Oakland Office Market: Rents Rising

In the past five years, downtown Oakland asking rents increased from $2.79 per square foot to $5.24 per square foot for class A and from $2.22 per square foot to $4.68 per square foot for class B. This accounts for an 88% increase for class A and a 111% increase for class B during a five-year period. Similar rental increases were recorded in surrounding areas such as the Oakland airport, Jack London Square and Emeryville.

“Class A and class B downtown Oakland asking rents have surged significantly over the years and these new rental rates might give local tenants sticker shock,” NKF research analyst Kyle Phillips tells GlobeSt.com.

East Bay Industrial Recap: Amazon Effect

The East Bay industrial market posted mixed signals, with more than 2.5 million in gross absorption, but 187,000 square feet of negative net absorption in the third quarter. This is due largely to lease renewals and a large amount of new construction, particularly in Fremont and Newark.

“The Amazon effect is significant in this market,” NKF executive managing director Steve Kapp tells GlobeSt.com. “Amazon currently has leases out for signature or letters of intent on over 3 million square feet. We project they will execute on these leases in fourth quarter 2019, leading to dramatically lower vacancy rates.”

The largest East Bay industrial deal of the third quarter was UPS leasing an 800,000-square-foot warehouse in Fremont on a phased-in basis. Average asking rents for warehouse space were $.86 per square foot per month.

“We expect this to remain relatively flat over the next several quarters due to macroeconomic trends,” Kapp continues. “Life science and advanced manufacturing demand also remains strong for the East Bay industrial markets.”

San Francisco: Supply vs. Demand

Demand of 7.6 million square feet outpaced supply of 6.5 million square feet and the overall vacancy rate dropped to 2.8%. The city granted Prop M allocations to several developments during the summer, but these projects are not expected to break ground until 2020.

“Vacancy is expected to stay low, and supply and demand will remain unbalanced until at least 2022,” NKF San Francisco research director Andrea Arata tells GlobeSt.com.

The restricted supply continues to push asking rates, which increased 8.9% year-over-year to $82.23 per square foot. Class-A asking rates increased 10.5% year-over-year to $91.22 per square foot.

“The San Francisco office market remains competitive and increasingly expensive, particularly for the large blocks of space. However, in light of the WeWork situation, the space-as-a-service sector’s more conservative approach to leasing has caused softening in the market for the smaller tenant community looking for 20,000 square feet and under,” Jennifer Essner, senior managing director with NKF, tells GlobeSt.com.

North Peninsula Subleases 33.3% of Availability

Overall availability decreased this quarter to 9.4%, down from 9.7% at the close of the prior quarter. On the sublease front, availability accounted for 2.4% of the total inventory and 33.3% of the total availability. Tenant demand decreased 16.6% in the third quarter of 2019 to 3 million square feet, with the bulk of the requirements now in the 10,000- to 20,000-square-foot-range. 405 East Fourth Ave. in San Mateo completed construction this quarter, delivering 62,338 square feet of preleased inventory to the downtown market.

Silicon Valley Demonstrated Fierce Retention Wars

“Active planning for corporate growth in Silicon Valley is omnipresent, while recruiting and retention wars have never been more fierce. We feel very comfortable about current tenant demand levels especially because of the diverse industry profiles of the users,” Michael Saign, NKF executive managing director who specializes in the Silicon Valley, tells GlobeSt.com.

The lengthy growth cycle has many concerned the market is nearing a downturn, yet gross absorption for the first three quarters of 2019 was nearly 200,000 square feet greater than that for the same time last year. One notable transaction was Softbank’s lease at Middle Plaza, not only because of its size but also because it was preleased well in advance of delivery, a sign of confidence that the region will remain strong.

“Demand-driven opportunism will carry the market through the end of the year, when patient tenants will be able to jump on quality and viable options,” NKF Silicon Valley research director Wing Lee tells GlobeSt.com.

South Bay Continues with Positive Absorption

The South Bay has recorded its eighth consecutive quarter of positive absorption. The office activity in Silicon Valley remained strong in the third quarter of 2019, posting positive net absorption for the eighth quarter in a row and bringing the year-to-date total absorption to slightly less than 1 million square feet. Net absorption for the third quarter was 390,213 square feet and gross absorption reached nearly 4.3 million square feet. Mainly due to a large lease by Verizon, San Jose once again led the market, posting 602,895 square feet of absorption on its own.

The total average asking rent increased $0.07 to $4.20 per square foot. In the largest direct lease deal of the quarter, 8×8 Inc. leased 177,815 square feet at South Bay Development’s Creekside Way project in Campbell. 8×8 will relocate its San Jose headquarters to the new Campbell space in early 2020, whereupon occupation 8×8 will be the largest employer in the city.