Fueled by tech company growth, San Francisco office rents rose sharply in
the second quarter and vacancies decreased, vaulting the city to the
leading spot in an otherwise-tepid national office market, according to
three separate research reports this week.
“San Francisco jumped to the No. 1 position in the country” for office
real estate performance, said Colin Yasukochi, vice president of research
at Jones Lang LaSalle and author of one of the reports. “Technology
companies are the underlying driving force in the San Francisco market.
It’s recovering very quickly” from the economic downturn.
He shows the city’s average asking office rent at $40.06 per square foot,
up from $33.71 a year ago.
Over the past four quarters, about 1.3 million square feet of space was
absorbed by tenants, “the best four quarters since 2008, which was the
peak of the market,” Yasukochi said. While the vacancy rate overall is
still a relatively high 16.2 percent, in hot neighborhoods such as South
of Market, it’s only 6.9 percent, he said.
Chris Macke, senior real estate strategist for research firm CoStar Group
in Washington, agreed that San Francisco is bouncing back.
“You folks have seen steady rental-rate increases for effectively every
quarter since early 2010, whereas nationally they’re still having
rental-rate decreases,” he said. “In the second quarter, San Francisco had
the largest rental-rate increases, going up 4.4 percent compared to the
first quarter. That’s very, very strong, far better than anywhere else in
the country.”
Part of the dynamic is that San Francisco tends to be volatile, as supply
is constrained for the most sought-after, higher-quality “creative”
spaces. “It’s a market that is prone to greater increases and decreases;
it acts like a tightly wound rubber band,” Macke said. Bright outlook
The San Francisco metropolitan area, which includes San Mateo County, was
also on top for rent increases between the first and second quarter in a
report from research firm Reis.
“I think the outlook for San Francisco is relatively bright,” said Ryan
Severino, an economist at Reis. “We expect to see fairly robust rent
growth there this year.” Both Oakland and San Jose metro areas also are
benefiting from increased office demand, Reis found. It ranked San Jose
fourth in the nation for rent increases and the East Bay ninth.
Tech firms increasingly are branching out from SoMa into downtown,
previously the domain of more traditional companies. ‘The hustle and
bustle’
“We like the hustle and bustle of the Financial District,” said Alex Mehr,
co-founder and co-CEO of online dating site Zoosk Inc., which signed a
lease in the second quarter for 21,391 square feet at 475 Sansome St. It
already was subletting the space from Yahoo.
“Software companies prefer SoMa because they hire a lot of Java developers
who live in the South Bay and so (being near) Caltrain is an advantage,”
Mehr said. “But we’re a Web company and our developers live in San
Francisco, so the Financial District is a much easier commute for them.”
Zoosk went from about 20 employees 18 months ago to almost 90 now. Mehr
expects the staff to double annually, so the company will soon outgrow its
current location. Rising rents don’t concern him too much. In the heart of
the city
“The advantage of being in the heart of San Francisco with quick access to
BART and having all that action all around us outweighs any increase in
prices,” he said.
Meade Boutwell, senior vice president with broker CB Richard Ellis,
recently represented a downtown building that remodeled a
3,000-square-foot space specifically to lure tech tenants.
“The Mills Building at 220 Montgomery is one of the oldest buildings
downtown, it’s a classic that survived the 1906 earthquake,” he said.
“It’s class B space with traditional dropped ceilings. We tore out the
ceilings, exposed the raw concrete, brick and piping, which made it very
creative-looking. The tech tenants that all wanted SoMa in 2000 said they
loved the feeling of the space; we had nine offers.” A tech company leased
the space for $41 per square foot, a premium from its $35 asking price.
Now the owner plans to do a similar rehab elsewhere in the building.
Executives at Starwood Property Trust, a real estate investment trust
based in San Francisco, said they are bullish on the city.
“San Francisco has held up better than most markets,” said Chris Tokarski,
managing director and chief credit officer. “In particular the tech growth
is creating more pressure and space is leasing up quicker. You can say
that about apartments, retail and office. It clearly is seeing growth on
all fronts.”
Original article via The San Francisco Chronicle
E-mail Carolyn Said at csaid@sfchronicle.com. ———————————————————————-
Copyright 2011 SF Chronicle
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