SAN FRANCISCO—After an active year marked by increased interest from both national and Asian investors, another busy first quarter was recorded in the San Francisco office market. An unemployment rate of 3.5% as of February, coupled with a growing population and booming technology sector, is driving demand across all asset classes, pushing prices upward.

According to Yardi-Matrix, no surprises here: the office sales market boasts the highest average price per square foot out of all the California markets analyzed in the first quarter ($769), more than six times the average price recorded in Sacramento, for example. Furthermore, while Los Angeles County registered the highest first quarter sales volume (22 transactions totaling $1.5 billion), San Francisco County came in a close second, with only eight trophy office sales totaling $1.35 billion. This is a 109% increase in sales volume year-over-year and six times higher than the volume recorded in first quarter 2013 ($225 million).

Though dollar volume dropped 23% compared to the fourth quarter of 2016, it was still the second-best first quarter in the past four years in terms of sales volume. At number one is first quarter 2015, when seven office properties traded for a total of $1.48 billion. By comparison, the highest quarterly sales volume in the past four years was recorded in the third quarter of 2014, when 12 assets changed hands for $1.85 billion, at an average of $565 per square foot, according to Yardi.

In terms of average price per square foot, the first quarter of 2017 was the best in the past four years for the office sales market (calculations of the average price excluded partial stake, ground lease and portfolio deals). The average per-square-foot price for trophy office buildings changing hands in the county reached $769, a 21% increase year-over-year and nearly double the price recorded in first quarter 2013 ($411).

“Transactions in both markets remain cyclical when comparing Y-O-Y or quarter to quarter. San Francisco rates in terms of costs per square foot in first quarter 2017 were $769 and when compared to first quarter 2015 of $711, show a more modest growth rate,” Doug Ressler, director of business intelligence, Yardi-Matrix, tells GlobeSt.com. “The high cost of construction makes building out office space an increasingly unattractive option for tenants. We anticipate this will result in improvement allowances.”

Prices have been rising constantly in the area during the past four years, and San Francisco is becoming increasingly appealing to both national and offshore investors–a top destination for Asian investors in 2016, surpassed only by New York City and Los Angeles in terms of trophy office sales. The average price per square foot in San Francisco in the first quarter was also nearly three times higher than the average price recorded in Los Angeles ($769 versus $294), says Yardi.

Though no large office developments were completed in the first quarter of 2017, activity will be picking up the pace in the following months. Three office projects exceeding 50,000 square feet in size are currently underway in San Francisco, with completion scheduled for the second quarter of the year. The largest development under construction is Lincoln Property Company's 19-story 372,000-square-foot office tower at 350 Bush St.

However, a continued slowdown in leasing activity is anticipated in 2017 because of financial market volatility, Fed policy and volatile VC funding throughout the year. San Francisco has maintained a lower vacancy rate of 7.2% but the Bay Area continues to suffer with a higher vacancy of 11.6% in the first quarter of 2017.

Various research has reported that the combined San Francisco and Bay Area markets had negative net absorption for the first time in 26 quarters. Additionally, there was a modest 1.3 million square feet delivered during the first quarter in the combined markets.

Appetite for space in San Francisco remains strong. The San Francisco area has 2017 projections of 5.71 million square feet completions versus 11.25 million square feet for the Bay Area. The larger Bay Area completions are anticipated to have a negative effect on leasing activity. New supply is expected to increase vacancy in both markets, says Yardi.

Yardi-Matrix data was used to analyze all sales for office buildings larger than 50,000 square feet to close in the county in the first quarter, along with new office projects scheduled for completion in the second quarter.

Instant Insights /

Y-o-Y Sales Volume More Than Doubles in Q1

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