san francisco office market report - q2 2016
TRANSCRIPT
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$71.65 FSClass A
Average Asking Rate
$64.83 FSClass B
Average Asking Rate
After several years of tremendous growth, it seems the San Francisco market might finally be showing signs of slowing down. Minimal rent growth in certain submarkets (1.5% in North Financial, -0.2% in Union Square, and -1.5% in SoMa) coupled with CBD negative absorption indicates the red-hot office market may be beginning to cool. And while a major slowdown seems unlikely, these figures combined with a decrease in the number of Bay Area venture capital funding deals witnessed over the last three quarters suggests that we may have reached a plateau for this market cycle.
With 463,000 SF of net negative absorption during Q2 2016, this marks the first time San Francisco has experienced negative absorption in the past 24 quarters (Q1 2010). The submarkets largely responsible for this negative absorption were the North Financial District and SoMa, which experienced 327,500 SF and 207,800 SF of occupancy losses, respectively. For the most part, this can be attributed to several
large block spaces “officially” becoming vacant during the quarter. Furthermore, as market uncertainty continues, tenants are increasingly growing more conservative with their decision making and expansion plans. This trend coupled with an estimated 4.7 million square feet of new office inventory set to come online by the end of 2017, will most likely lead to additional quarters with negative absorption in the coming years.
With rents well above historical averages, subleasing continued to be a popular move by tenants this quarter, accounting for three of the top five leases since April. Attractive because of their discounted rates, low build-out cost, and shorter lease durations on average, subleases continue to be desirable option for many tenants in this market. In the coming quarters expect to see a continued demand for premium sublease space as long as Direct Class A average rents remain in the high $70s and landlords demand long-term leases with large capital requirements.
Market Overview
Q2 2016 / Quarterly Office Market Report
San Francisco
Market Facts
5.6%Class A Vacancy
5.5%Class B Vacancy
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San Francisco Q2 2016 / Quarterly Office Market Report
Market Snapshot
While rents remained fairly strong, negative absorption for the first time in 24 quarters may be an early sign that the market is beginning to slow. In the coming quarter, expect to see more tenant demand for discounted sublease space and possibly continued negative absorption as large amounts of new inventory come online.
Historical Asking Rental Rate (FSG) Historical Vacancy
By Sector (Deals over 25K)
Market Inventory
82,637,205 SF
VacancyRate
5.6%
Net Absorption
-463,168 SF
Average Asking Rate
$69.46 PSF
Under Construction
4,692,500 SF
Salesforce Tower will have an estimated 1.4 million SF of space coming online in 2017.
Technology
Financial/Banking Legal Other
Business Services
68%11%
8%
8%5%
Technology
Financial/Banking Legal Other
Business Services
68%11%
8%
8%5%
$0.00
$20.00
$40.00
$60.00
$80.00
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 20160.0%
2.0%
4.0%
6.0%
8.0%
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Class A Class B Class A Class B
$64.83
$71.65
5.6%
5.5%
$0.00
$20.00
$40.00
$60.00
$80.00
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 20160.0%
2.0%
4.0%
6.0%
8.0%
Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016
Class A Class B Class A Class B
$64.83
$71.65
5.6%
5.5%
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Market By The Numbers
Historical Net Absorption & Leasing Activity
San Francisco Q2 2016 / Quarterly Office Market Report
SUBMARKET Total RBA (SF)
Vacancy Rate A
Vacancy Rate B
Avail Rate A
Avail Rate B
Net Absorp
(SF)
Under Construction
(SF)
Avg Ask Total
Avg Ask A
Avg Ask B
Direct Avg Ask
Total
Direct Avg
Ask A
Direct Avg
Ask B
North Financial 28,098,999 7.3% 7.5% 13.4% 12.6% -327,459 504,978 $68.96 $70.31 $64.15 $71.87 $73.75 $65.73
South Financial 24,835,645 3.8% 3.0% 14.6% 7.4% 9,136 3,057,522 $68.35 $68.57 $66.95 $74.78 $74.94 $68.33
CBD Average 52,934,644 5.7% 5.6% 11.2% 9.7% -318,323 3,562,500 $68.69 $69.50 $65.18 $73.18 $74.32 $66.49
SOMA* 12,867,460 8.5% 6.0% 15.4% 9.9% -207,820 450,000 $70.16 $76.69 $67.08 $72.41 $82.26 $67.15
Union Square 4,024,460 0.0% 4.5% 4.5% 9.9% 51,561 0 $62.57 $70.00 $62.05 $62.73 $70.00 $62.06
Mid-Market 3,957,378 5.0% 1.0% 10.2% 2.3% 2,448 0 $68.28 $70.92 $55.88 $64.24 $70.69 $52.43
Jackson Square/North Waterfront
5,158,051 3.7% 6.4% 5.3% 10.9% 11,398 0 $58.46 $59.19 $58.53 $60.74 $60.57 $61.07
Civic Center/Van Ness Corridor
1,951,424 4.9% 4.9% 8.3% 7.1% -2,432 0 $52.72 $57.00 $49.32 $53.66 $57.00 $50.38
Mission Bay 1,743,788 0.0% - 0.0% - 0 680,000 - - - - - -
San Francisco Total 82,637,205 5.6% 5.5% 10.8% 9.4% -463,168 4,692,500 $69.46 $71.65 $64.83 $71.63 $77.99 $65.73
*Includes China Basin, South of Market, Rincon/South Beach, Yerba Buena, Showplace Square, and Potrero Neighborhoods
Net
Abs
orpt
ion
Squa
re F
eet L
ease
dNet Absorption Leasing Activity
Q12012
Q22012
Q32012
Q42012
Q12013
Q22013
Q32013
Q42013
Q12014
Q22014
Q32014
Q42014
Q12015
Q22015
Q32015
Q42015
Q12016
Q22016
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
(500,000)
(250,000)
0
250,000
500,000
750,000
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© 2016 Avison Young [Avison Young - Northern California, Ltd.]. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.
AY San Francisco Team
Tenant Building Submarket Square Feet Type
Fitbit* 215 Fremont Street South Financial 311,166 Sublease
Lyft 185 Berry Street SOMA 110,654 Sublease
Stripe 185 Berry Street SOMA 102,392 Sublease
UCSF 499 Illinois Street Mission Bay 97,702 Sublease
Lyft 185 Berry Street SOMA 91,000 Direct
Top Leases
Building Buyer Submarket Square Feet Sale Price PSF
Market Center The Blackstone Group South Financial 752,738 ±$510,000,000 ±$678
140 New Montgomery Street Pembroke Real Estate South Financial 295,177 ±$284,000,000 ±$962
180 Montgomery Street Sidra Capital North Financial 304,162 ±$185,000,000 ±$608
799 Market Street ASB Real Estate Investments SOMA 142,902 ±$141,500,000 ±$990
274 Brannan Street CIM Group SOMA 105,225 ±$71,000,000 ±$675
Top Sales
Building Developer Submarket Square Feet % Leased Delivery
Salesforce Tower Boston Properties South Financial 1,420,081 58% Q2/17
Park Tower John Buck / Golub & Co. / Metlife South Financial 751,500 0% Q1/18
The Exchange Kilroy Realty Mission Bay 680,000 0% Q3/17
350 Bush Street / 500 Pine Street Lincoln Property / GEM North Financial 432,978 35% Q1/17
181 Fremont Street Jay Paul South Financial 410,313 0% Q2/17
Under Construction
Office Group
Nick Slonek, Managing Director / Principal 415.322.5051
Jonathan Allen, Principal 415.322.5053
John Cashin, Principal 415.322.5052
Riccardo Gale, Principal 415.322.5063
Raquel Ledesma, Graphics Designer 415.322.5057
David Linsmayer, Principal 415.322.5061
Jim Lucas, Vice President 415.322.5051
Melinda Miyagishima, Operations Manager 415.322.5058
John Norton, Principal 415.322.5054
Ana Potochniak, Administrative Coordinator 415.322.5060
Peter Setzer, Senior Vice President 415.349.3402
Ryan Smith, Marketing Coordinator 415.349.3400
Bethany Teodoro, Senior Vice President 415.322.5066
Robert Yeagle, Market Analyst 415.322.5056
Kathryn Zambetti, Vice President 415.322.5064
Griggs Ziesing, Vice President 415.322.5067
Property Management / Lease Administration
Roger Bilstad, CPM®, EVP, Management Services 916.426.3582
Tom Greenfield, CPM® LEED®, Property Manager 510.534.4700
Bryce McEfee, LEED® AP, Property Manager 916.426.3584
Tom McEfee, CPM®, SVP, Management Services 916.426.3570
Project / Construction Management
David Gonzales, Managing Director / Principal 415.322.5065
Shannon Dupler, Manager, Financial Reporting 415.349.3399
Clare Friel, Project Manager 415.349.3406
Nicole de la Rosa, Assistant Project Manager 510.254.4268
San Francisco Q2 2016 / Quarterly Office Market Report
Avison Young - Northern California, Ltd.601 California Street, 5th FloorSan Francisco, CA 94108T 415.322.5050 F 415.322.5055
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