San Francisco’s office market continues to boom — especially at the top.
Investors continue flocking to pick up trophy properties while at the same time tenants fight over the best of the trophy spaces, according to a report from JLL that analyzes “skyline” (or select Class A) office markets in 43 cities nationwide.
Competition for the best space in San Francisco could push rents to record highs near $100 per square foot.
“In the north Financial District, we are seeing the highest trophy rents at the top of the best buildings track close to that $100 per square foot level again,” said Christopher T. Roeder, an international director in the San Francisco office of JLL. “But the real story throughout the market is that there are now just a handful of very large blocks of space — those offering 100,000 square feet or more — to accommodate significant tenant expansions or major tenants coming into the market.”
In San Francisco, close to 50 buildings totaling 27 million square feet make up the skyline-qualifying market, including buildings such as the Transamerica Tower, 555 Mission St., the Bank of America tower at 555 California St., the four towers in the Embarcadero Center and 101 California St. (Check out JLL’s video on the right.)
According to JLL’s report, San Francisco’s skyline buildings had the highest rent growth in the country with a 9.6 percent bump in the past year and a 80.7 percent increase in rents in the past three years. “It’s a good time to be San Francisco skyline landlord,” the report states.
“Market fundamentals in the north and south financial districts continue to perform extremely well both because of the continuing demand among tech companies in the southern portion of the market and the commitment by many professional services and financial firms to stay in place in the northern part of the market,” Roeder said.
The last time rents hit the $100 per square foot mark was in 2007 and is still unheard of in the current market cycle, said Colin Yasukochi, San Francisco research director for CBRE, another brokerage firm, but gaming company Supercell came close last year with its lease at the top of the Bank of America building at 555 California St., at just under $100 a square foot.
It’s possible that some premier trophy spaces could reach that level. What Yasukochi sees happening is that technology tenants started taking up space in traditional financial district buildings after nearly all of the creative space in SoMa was gobbled up. Landlords were able to get higher rental rates for lower-floor space and that has pushed up rents for higher-floor viewspace.
“The options in lower cost space on lower floors is limited,” he said. “The pressure is coming from the bottom of the building to the top. That’s going to make $100 rents seem viable for the tenants that are already in that space or are looking for that kind of space.”
JLL has tracked four deals in the past year above $90 per square foot, all under 20,000 square feet, said Julia Georgules, research manager for JLL in San Francisco. Those deals were in 555 California, One Market Plaza and 101 California.
“We’ve seen this at the top of the last two cycles,” Georgules said. “The first time was the dot-com boom and in 2008.”
On the investment side, 2014 is already shaping up to be one of the strongest post-recession years for office sales since 2010, when $14.7 billion worth of buildings traded hands at an average of $804 per square foot. So far, this year, the average Class A building sale is for $765 per square foot. That includes deals like Invesco paying $297.1 million for the 388,370-square-foot 101 Second St.
“We’ve witnessed a number of significant trades of Skyline assets in the last 12 to 18 months,” said Michel Seifer, managing director in charge of JLL’s Capital Markets Group in the Western Region. “However, with asset pricing for prime, Class A office properties approaching, or in some cases exceeding, replacement cost, the emerging trend is the return of major skyline developments, especially in SoMa and locations with close proximity to the Transbay Terminal development area.”
Here are some tidbits about San Francisco’s Skyline market from JLL’s report:
- Total skyline availability as a percent of total market: 3.6 percent.
- Total skyline vacancy as a percent of total market: 3.5 percent.
- Total 2013 net absorption as a percent of total citywide net absorption: 35 percent.
- Skyline rent premium compared to overall market: 8.1 percent.