The anticipation of a San Francisco office market recovery by bullish landlords and optimistic economists appears to be ahead of reality in the second quarter of 2010. The City’s commercial real estate fundamentals remain weak, with total availability hovering at 19.7 percent, just below the all-time high of 20.2 percent reached one year ago, according to the San Francisco Studley Report.
Nearly 16 million square feet of office space is currently available for lease, and tenant demand has not turned a corner, despite marked improvement in other segments of the economy. In fact, leasing activity declined in the second quarter, down approximately 20 percent as compared to the first quarter, to 1.4 million square feet.
“The labor market, which is the forerunner to tenant demand, was hit particularly hard by the recession and is lagging behind other indicators of a broad economic recovery,” said Steve Barker, Studley executive vice president and San Francisco office branch manager. “The titans of San Francisco’s tenant base: legal, banking, and insurance companies are simply not growing in 2010.”
“However, both emerging and established technology companies are very active in the market, equaling 1.5 million square feet of requirements in total,” added Barker. “These companies have focused their attention South of Market (SoMa) where there’s an inventory, although limited, of creative space.” As a result of this concentrated activity, SoMa asking rents have surpassed those in the financial districts, in many cases, with the average overall asking rent equaling $31.52 per square foot at the close of the second quarter and the Class A asking rent standing at $33 per square foot.
Leasing Activity Falls
Leasing activity retreated in the second quarter, down approximately 20% from the first quarter, to 1.4 million square feet. On a trailing four-quarter basis, approximately 5.5 million square feet have been leased, up slightly from the previous quarter’s trailing year total, but 31% below the market’s 10-year historical average.
Asking Rents Rise
Average asking rents increased for the first time in two years to $29 per square foot, an uptick of 2.3% but still below the average asking rent of one year ago. While some landlords lowered rents in order to attract tenants and fill available space, others appeared to anticipate a market recovery and pushed asking rents higher, particularly in buildings South of Market, where technology company activity has been concentrated, and those with prime view space. Effective rents, however, have yet to find traction in a market still boasting availably near 20%.
San Francisco’s overall availability rate, 19.7%, fell just slightly from the previous quarter and remained near the all-time high of 20.2% reached one year ago. Class A availability increased 0.3pp in the second quarter and Class B availability rate declined 0.6pp.
Large Block Inventory Stable
The number of available large contiguous blocks of space (50,000 sf or more) remained unchanged at 48.
Almost one-third of NYSE Euronext CEO Report 2010 respondents do not believe that a full job recovery is going to occur until 2014 or later. Similarly, economic research and forecasting companies including Moody’s economy.com and Beacon Economics, as well as the Association of Bay Area Governments, are in agreement that San Francisco will not reach pre-recessionary levels of employment for at least another four years.
Without robust job growth, it is unlikely that tenants will be able to absorb the vast amount of available space in the market, and availability rates are not predicted to fall significantly in the near-term. Until availability rates decrease quarter-after-quarter, signifying the trend of a tightening market, landlords will have little justification to increase rental rates.