Financial District Dominates Investment Sales

Part 2 of 2

SAN FRANCISCO—In part one of this two-part office report on San Francisco, we noted that a wave of tech companies continue to devour existing office space by signing long-term leases and buying once-languishing investment properties. In part two on the subject, Colliers executive managing director Alan Collenette exclusively tells GlobeSt.com that “With Cities, it is untrue to say that every dog (city) has its day (age).” According to Collenette, “It is just that some do.”

Think Constantinople (Istanbul)  in the Renaissance, London at the height of the British Empire and the Industrial revolution, or Rome in the time of Caesar, says Collenette. “The world today is driven by innovation and technology. The teen years of the 21^st Century are San Francisco's  Golden Age—the age of innovation belongs, unchallenged, to San Francisco.”  

According to Collenette, approximately 51% of all venture capital spent in the US lands in the San Francisco Bay Area.

According to a recently Colliers office report for the area, in the South Financial District, the rise in occupancy levels was attributed to the newly delivered 535 Mission St. development, where Trulia moved into approximately 104,000 square feet. In addition, DocuSign, SocialChorus, and Sift Science collectively moved into nearly 42,000 square feet of sublease space at 123 Mission St. In the Portrero East submarket, key contributors to the positive net absorption were Invuity moving into over 38,000 square feet at 444 De Haro St. and Dot & Bo occupying some 21,000 square feet at 200 Kansas St., Colliers reports.

At year end, the report notes that the City recorded 14 transactions totaling more than 100,000 square feet with three of those closing in the fourth quarter, including Kirkland & Ellis' renewal/expansion of 125,000 square feet at 555 California St.; Pinterest leasing more than 120,000 square feet at 651 Brannan St.; and Yelp accounting for 102,324 square feet at 55 Hawthorne St.. Notable among the other four leases in the fourth quarter was Uber's new lease of 77,644 square feet at 685 Market St., again “underscoring the wholesale movement by tech firms to the City,” says Colliers.

There were a total of 14 office sale transactions during the fourth quarter for a combined value of $1.9 billion, compared to 16 sales of office properties sold in the third quarter for a combined value of $2.0 billion, Colliers notes. In the first half of this year, the company recorded 22 office sales for a total of $2.55 billion. For the full year, Colliers recorded 50 sales of office properties for a total of $5 billion. In comparison, 2013 experienced 45 office sales closed for a total value of $2.38 billion.

Overall weighted rental rates for class A assets reflected an increase of 2.6% for the quarter and annualized rents continued to climb and finished the quarter and the year up 18.4%, resuming its normal pattern of rental increases that had been interrupted in the third quarter when rents artificially declined, the reported noted. Collenette says the third-quarter decline was an anomaly due to tenants moving into previously committed large blocks of space in newly completed projects or buildings that were under construction at the time.

On the investment front, the San Francisco office market continues to be one of the nation's strongest due to a variety of factors that are tied indirectly to the movement of tech firms to the City, Colliers says. These include job growth generated by these high-growth firms, the continuing rise is leasing levels and prices, a demand factor that is growing, and an abundance of available capital to invest, the report explained.

Demand for assets in the San Francisco market from both domestic and foreign capital sources continued to be voracious during the fourth quarter, the report noted. There were a total of 14 office transactions closed this quarter for a combined value of nearly $1.9 billion. This year there were 50 office sales closed for a total of $5 billion.

In comparison, 2013 experienced 45 office sales for a total value of $2.38 billion, Colliers reported. Prices continued to rise for class A assets this quarter, as the average increased to $603 per square foot from $581 per square foot in the third quarter. Conversely, prices for class B assets softened slightly to $503 per square foot from $520 per square foot, the report notes.

The Financial District continued to dominate investment sales, accounting for over half the investment sales during the fourth quarter. The two largest sales that closed were in the south Financial District, where 50 Beale Street sold for $395 million, or $595 per square foot, and 405 Howard Street sold for $390 million, or $748 per square foot. Colliers also cautioned that sales prices will continue to climb well into 2015, although it expects that sales volumes may slow.

With all of the new companies coming into the city, demand has gone through the roof for both new and existing office properties,” adds Colliers EVP Tony Crossley. “We are finding that investors—both institutional and individual—are all trying to figure a way into this office market and the opportunities and the capital are both there.”