The tech sector continues to drive the San Francisco office market, with the rapid expansion of local companies as well as an influx of Valley firms and others from outside the region contributing to the acceleration. Following a sluggish first half of 2013, tech companies resumed their aggressive pursuit of space in the third quarter, according to the San Francisco Studley Report, Studley’s analysis of office market conditions in the city. Overall leasing volume equaled three million square feet, significantly higher than the historical quarterly average of 1.9 million square feet.
While some larger tech companies are considering options in multiple areas of San Francisco, including Mission Bay, small to medium-sized companies continue to target SoMa’s industrial-style, creative space, driving rents in Class B product above that of Class A space in some cases.
This disruption of long-standing market dynamics can also be seen in the dichotomy between the tech sector and the rest of the market. Tech tenants can’t find space quickly enough, making pre-emptive strikes and warehousing blocks of space in anticipation of future growth. In contrast, legal, financial and other traditional space users are taking a more analytic and cautious approach, having largely too much space already. As these firms address their occupancy needs, it is likely space will be returned to the market increasing availability in some key sectors.
“It is critical that tenants of all sectors and sizes understand the pace of the market and rationally assess alternatives in both the short- and long-term,” said Steve Barker, Studley EVP and branch manager of the firm’s San Francisco office. “For example, large tenants with leases expiring between 2015 and 2017 have the time to assess whether or not the market’s growth will continue unabated. One potential opportunity for these users is the next wave of top-tier product which is set to deliver during the same timeframe. The first tenants to make sizeable commitments in the new projects will likely capture the greatest space efficiencies and generous concessions.”
“Other pockets of opportunity include alternative submarkets such as Waterfront/North Beach, particularly for smaller and mid-sized companies, moving all or some operations to the East Bay, and leveraging current tenancy into a long-term renewal, thereby avoiding significant capital outlays,” added Barker.
Other key findings:
- Overall asking rent increased by 6.4% to $48.95. Asking rent for Class A space increased to $51.47.
- Availability rates hold steady at 11.6% overall and 11.1% for Class A space.
- The number of large contiguous blocks of inventory remained stable at 33.
- The top three transactions of the third quarter were:
- Kaiser Permanente’s $55.2 million purchase of a parcel at 1600 Owens Street on Alexandria Equities’ campus. Alexandria will construct a new building of up to 246,148 square feet for the healthcare company.
- Northern Virginia-based Neustar Inc. leased 144,000 square feet at Foundry Square III, taking four floors at 505 Howard Street.
- eBay signed a 136,432-square-foot lease at 199 Fremont Street, a near-doubling of the 75,000 square feet it occupies at the property.
Click here to access the full report: San Francisco Studley Report – Q3 2013