Early Q2 Data Show Office Rents Still Falling

The average, effective, non-weighted class-A rent now stands at $33.09, down 12.4% from the end of March. The overall weighted class A average is $34.09, down 9.8% from the end of March. Year-to-date, the weighted and non-weighted averages are down 15.1% and 19.6%, respectively. The results are based on the 105 completed deals Colliers has tracked quarter-to-date.

"The descent in rental rates is mainly due to the market experiencing its lowest leasing activity in over fifteen years," says Scott Harper, senior vice president of Colliers' Urban Landlord Partners regional practice group. "Tenants that have been in the market are taking a 'wait to see' approach."

They are waiting to see if the market will go lower. They are waiting to get a better idea of their own needs given the new economy. Based on done deals and negotiations, however, Harper sees a trend taking shape.

"From our estimate, tenants with 2010-2011 lease expirations are beginning to opt for a 'flight to quality' by capitalizing on the City's supply of premium office space at low rental rates to upgrade their facilities," he says.

Class B rents also felt downward pressure in the second quarter, with the non-weighted average effective rent falling 11% to $26.16 per square foot and that weighted average rent falling 14.8% to $25.87 per square foot. Year-to-date, the non-weighted and weighted averages are down 21.7% and 27.3%, respectively.

The overall class A market in San Francisco, approximately 52 million square feet, has an average vacancy rate of 13.7%. Looking just at the 40 million square feet of class-A space in the north and south financial districts, average vacancy stands at 12.9%. When sublease space is removed from the equation the two percentages drop to 11.4% and 10.3%, respectively.

Breaking it down further, the south financial district is outperforming the north financial district. Overall average vacancy in the north financial district is 14.4% compared to 10.8% in the south financial district. However, with substantially more vacant sublease space in the north financial district (894,500 square feet) than in the south financial district (219,500 square feet), the direct vacancy numbers are much closer, 11% in the north versus 9.8% in the south.

The biggest market after the financial districts is the 6.3 million-square-foot Civic Center/Mid-Market district, which has 1.2 million square feet of available space, most of it direct, for a 19.1% vacancy rate. It was one of the few markets to post positive net absorption in the quarter, albeit nominal.