SAN FRANCISCO—The San Francisco office market got off to a strong start in the first quarter of 2014.
Strong job gains propelled by the technology sector continued to be a main driver of record leasing, according to a report from Cushman & Wakefield’s Northern California research team. Overall leasing activity for the quarter totaled 1.9 million sq. ft., the third-highest level for a first quarter in 10 years, according to the firm’s Q1 2014 MarketBeat Office Snapshot, released Monday.
“This record leasing activity came just as a first wave of new construction was completed within the CBD,” noted Andrea Arata, Cushman & Wakefield’s Northern California research manager. “While this new construction coming online resulted in a slight uptick in the Class A CBD vacancy rate, to 9.1% from 8.9% last quarter, the majority of the tenants signing new leases had not moved in before the end of the quarter, and we will see the absorption of that space throughout the rest of 2014,” she added.
According to the C&W report, tech companies continued to dominate leasing activity with significant new leases by Twitter, Dropbox, LinkedIn, Trulia and Practice Fusion, as well as Google’s 372,000-sq. ft. renewal at Hills Plaza. (Note: Cushman & Wakefield does not count renewals in overall leasing activity statistics.)
Twelve leases (both new and renewal) were larger than 50,000 sq. ft. with six of those leases topping out at more than 100,000 sq. ft. With such large leases during the first quarter, the average new lease size increased to more than 15,000 sq. ft. – 90% higher than where it stood one year ago at 7,900 sq. ft. and 70% higher than the annual average over the past three years of 8,700 sq. ft.
“Despite concerns about some companies leasing ahead of current needs and quickly putting sublease space on the market,” added Arata, “the sublease vacancy rate still remains below 1%.”
class A direct rents in the CBD continued their upward momentum during the quarter, increasing by 3.8% to $60.20 per sq. ft. (psf), the highest average asking rent in nearly 14 years. Overall citywide asking rents increased to $55.22 psf while the vacancy rate remained unchanged at 9.8%.
A total of 1.2 million sq. ft. of new space was added to the inventory with the completion of Foundry Square III along with three major renovation projects: 50 Hawthorne Street, 155 Fifth Street, and 680 Folsom.
“By 2015, we expect another 2.4 million sq. ft. of both new and renovated buildings to be delivered to the market,” said Arata. “Currently, nearly 40% of this space has already been pre-leased. Given forecast annual employment growth of over 2% through 2015, increased leasing velocity, and expansions within the technology sector, San Francisco looks to be in a solid position to absorb this new space,” she added.
According to Caroline Rooney, managing director for Capital Markets Research at Cushman & Wakefield, “The San Francisco investment market remains highly competitive as the strong leasing market is attracting both well-capitalized foreign buyers and core investors. With San Francisco among the top three global markets in which to invest, according to AFIRE‘s latest survey, there has been an influx of European and Asian buyers.”
Norges Bank, the Norwegian sovereign wealth fund, acquired a 48% interest in 425 Market Street. Asian buyers picked up 1550 Bryant Street and 211 Sutter Street, and 225 Bush Street is in contract with a Chinese buyer. The quarter’s largest investment transaction was Invesco’s purchase of 101 Second Street for $765 psf at a sub-4% cap rate. “With mounting pressure to place money here, potential buyers are lowering their size threshold and are willing to invest in smaller deals,” added Rooney.