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SAN FRANCISCO-The office market here has experienced 1.1 million sf of net absorption so far in 2006, with about half of that occurring in the third quarter, according to a third quarter review by Chris Roeder of Cushman & Wakefield San Francisco. As a result, Citywide vacancy is down to 11.4% and CBD vacancy stands at 12%, a five-year low, according to the report.

Moreover, the CBD sublease vacancy rate is down to 1.5% from 9.2% in mid 2002, which is alleviating its negative impact on the value of direct space. The current direct asking rent for class A space in the CBD, $39.72 per sf per year, is up less than 1% from the end of the second quarter but is nearly 20% ahead of where it was this time last year.

“As the increase in asking rental rates often lags the reduction in vacancy, it is expected that asking rents will continue to increase over the next quarter as the vacancy rate approaches single digits,” states Roeder in his report.

Effective rents for view space, which is in short supply, is upward $55 per sf, according to the report. One third quarter lease–by Renaissance Technology Corp. for space at Piers 1 ½, 3, 5–has a triple-net face rate of $69 per sf.

The tightness of the market has caused two new office projects to commence. Projects at 555 Mission St. and 500 Terry Francois Blvd. are expected to come online in 2008. Previously under way is Equity Office Property Trust’s 335,000-sf Foundry Square I development, which is set for delivery this time next year.

Third quarter leasing activity occurred primarily in class A space in the CBD. The North Financial District saw the steepest decline in vacancy in the third quarter, dropping 160 basis points to 13.6%. South Financial District held steady with an average direct vacancy rate of 10.5%.

“Improving economic fundamentals and an insurgence of small to mid-size high-tech and financial services firms will continue to drive demand,” concludes the report. “With little new construction coming online in the next year, San Francisco should expect to see the vacancy rate dip below 10% for the first time since 2001.”

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