San Francisco’s CRE Market Gains 2.9M SF in Q2

The commercial real estate market in the San Francisco Peninsula recorded a marked improvement in the second quarter, according to a recent report from Colliers. Overall, gross absorption was 2.9 million square feet, a 184.5% improvement from the second quarter of 2020. The report includes office, industrial and R&D assets in its analysis.

The R&D sector drove much of the gains in the second quarter. The report attributes the positive gross absorption to the gain in gross absorption to 2 million square feet of office and R&D space new construction deliveries, of which 95.3% was immediately absorbed when it hit the market. R&D space had positive net absorption for the fourth consecutive quarter of 388,000 square feet, a significant improvement from the 49,000 square feet of positive absorption in the second quarter 2020. Still, the sector has a 6% vacancy rate, up 160 basis points year-over-year, but asking rents have increased $1.18 to $5.09 per square foot.

There have been several significant life science properties in the market and surrounding area. In May, Phase 3 Real Estate Partners and Bain Capital Real Estate secured more than $400 million in construction financing for Genesis Marina, a 570,000-square-foot life science campus in Brisbane.

On the office front, gross absorption totaled 1.66 million square feet, and the vacancy rate remained flat at 11.1% and rents are flat at $6.59 full service per square foot. The sublease market continues to be significant, accounting for 28% of the total vacancy rate and running at a 7.7% discount to direct office space. While the market was relatively stagnant, there was a rebound in off-market leasing activity that signals improvement. As a result, the report expressed optimism about that leasing activity is beginning to turn around.

The industrial sector vacancy rate compressed nominally from 4.1% to 4%, the lowest since the end of 2019. There was also 490,000 square feet of gross absorption but 30,000 square feet in lost occupancy during the second quarter. In addition to the occupancy losses, the rental rate fell $.10 per square foot to $1.62 NNN.

Overall, the San Francisco peninsula has a 7.7% vacancy rate, a 150 point increase last year from the same time last year, and asking rents are flat at $6.11 per square foot. Colliers forecasts the vacancy rate will continue to increase, as will rental rates. Net absorption and the construction pipeline is also expected to increase this year, all good signs of the marker stepping toward recovery.