Low Vacancy, High Demand is the Theme for Bay Area Leasing

Low vacancies and high demand dominated the discussion at The Registry’s Mid-Year Broker Forum earlier this month, where several of the Bay Area’s top leasing and investment brokers spoke on the state of the commercial real estate market.

For Nick Slonek, principal and managing director at commercial real estate services company Avison Young, San Francisco’s office vacancy level of around 6 to 7 percent paired with more than 6 million square feet of tenant demand, 80 percent of which comes from tech, represents a renaissance.

“San Francisco is the most dynamic market in the world right now,” he said.

Throughout the discussion, several panelists spoke about the health of their respective sectors of commercial real estate, addressing retail, life sciences, industrial markets and emerging technology.

Rhonda Diaz Caldewey, managing director at DTZ Retail—Terranomics, described San Francisco as one of the hottest cities in the world for retail. Low unemployment combined with high incomes, population density and sales volume drive demand to the city—demand that has resulted in a 2.4 percent commercial real estate vacancy for retail, the lowest in the country, she said.

This demand hasn’t come without a cost though. “Expansion demand is much higher than supply,” Diaz Caldewey said. With retailers refusing to expand outside the most attractive real estate and low levels of new development, she explained, rents have been driven up.

“We’ve seen 20 percent year over year increases throughout the Bay Area,” Caldewey said.

Anchored by Stanford University and the University of California’s Berkeley and San Francisco campuses, the Bay Area also is a global leader when it comes to life sciences.

James Bennett, executive vice president and managing partner at commercial real estate firm Kidder Mathews in San Francisco, explained that unlike tech, life science is a long view capital-intensive industry. Products can take up to 10 years from initial research to Food and Drug Administration approval. When it comes to real estate though, similar to retail, demand for space is high and vacancy is low.

“You have people calling every day looking for lab space in San Francisco, and there is none,” Bennett said. “If you are able to get space, rents are in the $50 per square foot triple net range.”

Finding space is complicated for the industry, since buildings that work for biotech and life sciences require certain specifications. Supply of such real estate remains low given the small amount of new development across the Bay Area and the limited number of buildings that can be repurposed for lab use.

“Our main problem right now is that the tech industry is such a megaforce. It’s dominating the region and taking a lot of space out of the hands of biotech,” Bennett said.

Greig Lagomarsino, an executive vice president in the Oakland office of real estate brokerage Colliers International, took the conversation to the East Bay, where the industrial market is bustling with new construction.

Despite the booming market, manufacturing and warehousing face many of the same problems as other markets—rising rents and lack of space. Amidst companies running out of space in the East Bay and continued expansion by BART, which bought 400,000 square feet off the market recently, Lagomarsino predicted the Central Valley would become a new hub for expansion with lower rents and untapped space.

But Savills Studley Executive Managing Director John Brady said rather than indicating healthy growth, high rents and low vacancies have made this the worst market in his 40 years of experience. Working as a tenant representative with emerging technology companies, Brady said many of these companies are forced to compete for space, overpay and sign long-term leases.

“One of our biggest challenges is finding the capacity of space to meet the hiring demand of these companies,” he said. “If they have a choice, moving south is a great idea, and moving east is a great idea.”

Panelists foresaw some sort of downturn in the next two to four years but said they are confident that the market was healthy enough to sustain whatever correction came its way.

“There’s an unbelievable appetite to be in the Bay Area,” said David Bergeron, managing director at real estate brokerage T3 Advisors in San Francisco. “There may be a correction, but the tech [industry] is so healthy, and it’s such a big part of our overall global economy. In this area, we’re good.”

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