San Francisco Office Demonstrates Record Strength
The acquisition of 350 Rhode Island presented a compelling opportunity to participate in a robust and technology-centered office market, and do so with an attractive yield and at below-replacement basis.
SAN FRANCISCO—A number of records were shattered in the dominant office sector last year, including record-high rents and new construction deliveries, according to Cushman & Wakefield’s year-end office market report. In addition, vacancy reached a three-year low, while tenant requirements held strong.
One example of substantial development and investment activity is the Showplace Square submarket. Formerly an industrial and showroom area, it has been the beneficiary of a significant influx of tech firms during the past decade. Additionally, residential developers continue to deliver new housing supply into surrounding areas, providing an abundance of living options for high-income tech employees who work in this submarket.
The 100% occupied multi-tenant property, 350 Rhode Island St., is at the northern base of the Potrero Hill neighborhood within the Showplace Square submarket. PCCP LLC recently acquired this four-story 138,393-square-foot class-A office building for $120 million. The property features 35,000-square-foot floorplates and a distinctive architectural design.
“350 Rhode Island presented a compelling opportunity to participate in San Francisco’s robust and technology-centered office market, and do so with an attractive current yield and at a basis below today’s replacement cost,” said Dorian Farhang, vice president with PCCP. “This market continues to demonstrate record strength and 350 Rhode Island is a quality creative office building, with large floorplates and above-market parking that will support the asset’s long-term relevance within the leasing market.”
Constructed in 2001, 350 Rhode Island was completed as two interconnected four-story office buildings over three levels of subterranean parking. The buildings are now under separate ownership.
Farhang noted that the parking structure component of PCCP’s acquisition provides added cash flow for the investment as it serves not only the subject building but the adjacent building and other office tenants in the area.
“Despite record rents and valuations, with proper leverage and a long-term outlook, San Francisco continues to be an attractive investment market, especially for a quality modern asset,” Farhang tells GlobeSt.com.
350 Rhode Island is located directly across the street from Whole Foods and near numerous neighborhood amenities. The property is situated between US 101 and Interstate 280 along the 16th Street Corridor at the confluence of the Mission District to the West, Potrero Hill to the South, SOMA to the North and the Mission Bay neighborhood to the East.
Overall, the San Francisco office market vacancy closed 2018 at just 6.4%, with both North and South Financial submarkets—the two largest countywide based on square footage—coming in at 7.7%. Other core submarket vacancies included SOMA (3.1%), Mid-Market (4.3%) and Union Square (5.8%). Notably, Mission Bay had zero office vacancy, according to Cushman & Wakefield.
Also favorable to the market’s economic stamina, the most recent San Francisco metropolitan division (San Francisco and San Mateo counties) unemployment rate was a minimal 2.2%, dropping even further below the year-ago figure of 2.6%. Year-over-year total private sector jobs increased by 2% to 1.023 million while office-using positions increased 2.5% to 397,400, says the report.