Leasing activity in the final quarter of 2010 fell to 1.3 million square feet, just two-thirds of the market’s historic quarterly average of 1.9 million square feet, according to the fourth quarter 2010 San Francisco Studley Report. On a trailing four-quarter basis (the sum of all leasing activity over the last four quarters), leasing volume fell to 6.1 million square feet, approximately 22 percent below the market’s historical average.
“The lack of large lease signings in the fourth quarter underscored the market’s vulnerability as major transactions propped up the market while the majority of tenants were downsizing,” said Steve Barker, Studley executive vice president and branch manager of the firm’s San Francisco office. “Eight deals equaling 100,000 square feet or more were executed during the first three quarters of the year, while Google’s 63,000-square-foot expansion was the largest lease signed in the final quarter of 2010.”
As a result of weaker leasing activity, the total availability rate inched up slightly to 18.4 percent. The rate had fallen for four consecutive quarters after peaking at 22 percent in the third quarter of 2009.
Local tenants exit market
Several long-standing local tenants are exiting the market completely and relocating to lower-cost alternatives. The State Compensation Insurance Fund announced plans to move out of the 385,000-square-foot headquarters building it owns and occupies at 1275 Market Street. The organization will be relocating employees to less expensive offices in other cities throughout the Bay Area. Similarly, the U.S. Department of Agriculture plans to vacate approximately 25,000 square feet as it relocates from two floors at 33 New Montgomery Street to Downtown Oakland. The Patelco Credit Union, which had previously announced plans to move its headquarters from San Francisco to Livermore, sold its 144-154 Second Street and 156-160 Second Street buildings. Approximately half of the office space in the two buildings was available at the end of the fourth quarter, with the remainder expected to hit the market in early 2011.
“Cost-cutting relocations like these will lower the overall demand for San Francisco’s office space in 2011 and free up additional options for tenants,” noted Barker. “Although major lease deals completed by red-hot tech companies including Twitter, Zynga, and Salesforce.com dominated the headlines in 2010, the market’s traditional tenant base of financial service providers and law firms, as well as government agencies, continued to contract heading into 2011.”
Other Key Findings
Asking Rents Rise
Despite lackluster demand from all tenant sectors other than tech, landlords raised overall asking rents 1.8 percent in the fourth quarter, from $29.50 per square foot, full service, to $30.04. Class A asking rents increased 2.8 percent to $31.35. Landlord pricing power is strongest South of Market.
Availability Slightly Elevated
San Francisco’s overall availability rate equaled 18.4% in the fourth quarter as compared to 18.3% in the previous quarter, with approximately 15 million square feet currently available.
Large Block Inventory Stable
The number of available large contiguous blocks of space (50,000 square feet or more) equaled 48, as compared to 49 last quarter.
The limited and industry-specific nature of the nation’s economic recovery can hardly be considered robust. Furthermore, commercial real estate fundamentals, as a rule, trail the broader economy by six months.
Leasing activity is not expected to return to historical averages unless the velocity of employment growth picks up. “Locally, only 1,100 office-using jobs were regained in the second half of 2010. An additional 33,000 must be recovered in order to reach pre-recession employment levels,” explained Barker.