SAN FRANCISCO—During the past few years, San Francisco has arguably been one of the most attractive markets in the United States, consistently being rated at the top of the emerging trends in real estate survey by PwC US and the Urban Land Institute. The market is facing the challenge of convincing the rest of the market that San Francisco's boom does not necessarily need to be followed by a bust. Recent growth may not have been sustainable, but it doesn't mean that normalized growth is a bad thing, GlobeSt.com learns.

The recent strength of the San Francisco economy has created shortages in labor, housing and commercial space, resulting in a quick rise in costs. San Francisco's highly regulated operating environment can make it a challenge to address issues such as housing and commercial space shortages, while the housing industry, in particular, is reporting a rise in organized resistance.

However, foreign investors in the market have shown an interest in investing in longer-term development projects and have not been limited to existing properties. The bottom line for San Francisco is, while growth may be slower in the next few years compared with the last few years, the pace of real estate activity is projected to be strong, says ULI.

According to a similar survey by CBRE, with a 47% growth rate from 2013 to 2015, San Francisco created more than 22,000 high-tech jobs and was the top tech growth market on CBRE's annual Tech-Thirty report. The Tech-Thirty analyzes the 30 leading US and Canadian technology markets in terms of high-tech software/services job growth.

Silicon Valley ranked first for total new high-tech job creation by adding nearly 28,000 during the same time period. During 2016, the pace of job creation slowed from rapid to brisk amid tightening of venture capital and equity markets. This caused a pause in growth and resulted in increased sublease space, says CBRE. However, by mid-year, growth resumed with increased demand drawing down the amount of available sublease space and keeping rents steady among these top tech markets.

GlobeSt.com learns that tech-related office leasing accounted for 20% of all US office leasing in the first half of 2016, up from 18% in 2015, despite an overall slowing in tech job creation. Tech office leasing in San Francisco accounted for 54% of all leasing activity through the first half of 2016.

CBRE's report showed that the hottest tech submarkets where tech job creation continues to boom—led by East Cambridge, MA, Palo Alto and Santa Monica, CA—are significantly outperforming overall markets in terms of leasing activity and rent premiums, fueled primarily by the demand for highly skilled tech talent.

The CBRE report also shows that office rents for the top submarket in each of the 30 markets analyzed increased in all but one submarket between the second quarters of 2014 and 2016. The highest rent growth in this period occurred in both established and up-and-coming tech submarkets, illustrating stiff competition among tenants to locate in areas rich in talent such as Oakland/East End Pittsburgh, East Cambridge, Palo Alto and Tempe, AZ.

Silicon Valley ranked highest in overall rent growth and net absorption. The overall office market rents increased 28.4% between the second quarters of 2014 and 2016 while tenants absorbed more than 10% of office stock.

CBRE also analyzed the Tech-Thirty markets according to high-tech industry job growth. San Francisco topped the rankings for the fifth consecutive year. Its high-tech job base has grown 47% between 2013 and 2015, while average asking rents increased by 22.7% between the second quarters of 2014 and 2016.

During the past five years, the software/services industry created 780,000 new jobs at a 7.3% growth rate and accounted for nearly 20% of major leasing activity, says CBRE. In 2016, tighter labor and volatile capital market conditions led to job creation slowing to a 4% annual growth rate, which had a slight impact on certain office markets, such as Washington DC, New York and the Bay Area.

However, the San Jose technology industry is relatively diverse. The market is home to firms focused on software, hardware, the consumer market, the business market, established global heavyweight companies and entrepreneurial startups. This combination has made the San Jose economy one of the fastest growing in the United States. The result is a very competitive labor market that has driven the jobless rate well below 4% and pushed income gains well above the national average, says ULI.

The number of tech firms located in San Jose increases the competition for real estate in the market. To compete with markets such as San Francisco, San Jose has increased the focus on developments near transit stations, amenities and housing. The strong job market and limited supply have made the San Jose market one of the most expensive in the United States. The amount of housing construction will increase in 2017, with more emphasis on multifamily units to help meet rising demand.

Instant Insights /

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