San Francisco Office Market Summary Q1 2019
Core Content Overview
The San Francisco office market experienced strong performance in Q1 2019, driven by robust leasing activity, rising rents, and continued investment interest. Despite a relatively low vacancy rate, the market showed signs of increasing scarcity for large block spaces and ongoing pre-leasing activity for future developments.
Key Economic Indicators
| Indicator |
Q1 2018 |
Q1 2019 |
12-Month Forecast |
| San Francisco Metro Employment |
992M |
1,032M |
▲ |
| San Francisco Metro Unemployment |
2.5% |
2.3% |
■ |
| U.S. Unemployment |
4.1% |
3.8% |
▼ |
- San Francisco Metro unemployment dropped to 2.3% in Q1 2019, down from 2.5% in Q1 2018 and below the year-ago figure.
- Office using positions increased by 5.1% YOY, a full percentage point higher than the previous 12-month growth.
- Total private sector jobs rose by 4.0% to 1,032,400.
Market Indicators
| Indicator |
Q1 2018 |
Q1 2019 |
12-Month Forecast |
| Overall Vacancy |
7.6% |
5.8% |
▼ |
| Net Absorption (sf) |
2.2M |
830k |
▲ |
| Under Construction (sf) |
4.7M |
2.4M |
■ |
| Average Asking Rent (psf/year) |
$71.40 |
$77.26 |
▲ |
- Overall vacancy fell to 5.8%, just above the 10-year low of 5.6%.
- Citywide new leasing totaled 2.3 million square feet (msf), surpassing the 10-year quarterly average of 1.8 msf.
- Active tenant requirements increased significantly, reaching 6.5 msf in Q1 2019.
- Large block demand rose by 41% YOY, far outpacing supply.
Key Lease Transactions
| Property |
SF |
Tenant |
Landlord |
Transaction Type |
Submarket |
| 88 Bluxome Street |
488k |
Pinterest |
Alexandria Real Estate |
New Lease |
SOMA |
| 633 Folsom Street |
270k |
Asana |
The Swig Company |
New Lease |
South Financial |
| 45 Fremont Street |
207k |
Slack |
Shorenstein |
New Lease |
South Financial |
| 215 Fremont Street |
140k |
Google |
Clarion Partners / LPC West |
New Lease |
South Financial |
| Three Embarcadero Center |
128k |
Cooley LLP |
Boston Properties |
New Lease |
North Financial |
| Four Embarcadero |
85k |
Marsh Insurance |
Boston Properties |
Renewal/Expansion |
North Financial |
| Two Embarcadero Center |
80k |
O’Melveny & Myers |
Boston Properties |
Renewal |
North Financial |
- Five new leases for over 100,000 sf were signed, with four to tech firms and one to a law firm.
- Pre-leasing activity was notable, with tenants committing to spaces that are not yet entitled.
Key Sale Transactions
| Property |
SF |
Buyer |
Seller |
Price / $PSF |
Submarket |
| 215 Fremont Street |
373k |
Clarion Partners / LPC West |
Jack Resnick & Sons |
$335,500,000 / $898 |
South Financial |
| 111 Sutter Street |
286k |
Paramount Group |
JLL Income Property Trust |
$227,000,000 / $793 |
North Financial |
| 550 Terry Francois Blvd |
283k |
Gap Inc. |
Hines |
$342,500,000 / $1,210 |
Mission Bay |
| 350 Rhode Island |
138k |
Pacific Coast Capital Partners |
Lincoln Property Company |
$120,000,000 / $867 |
Showplace Square |
- Office valuations continued to rise, with the top transaction being the sale of 550 Terry Francois Blvd to Gap Inc. at $1,210 psf.
- Investment activity in San Francisco reached $1.24 billion in Q1 2019, keeping pace with Manhattan's $1.41 billion.
Outlook
- Further pre-leasing of large proposed/unentitled sites is expected.
- Large block availabilities remain scarce, with only five contiguous space options available for occupancy through 2023.
- Vacancy rates are expected to continue falling, with additional rent increases anticipated through 2019.
- A potential surge in IPOs from tech companies in 2019 may drive further wealth creation in the market.
Construction & Development
- Under construction inventory reached 2.4 million square feet (sf) at the end of Q1 2019.
- The delivery timeline extends from mid-2019 to 2023, with most of the under-construction space already pre-leased.
- Pending litigation in the Central SoMa District adds uncertainty to future development timelines.
- Only 2.9 msf of large cap projects are currently in the Prop M queue, indicating limited approval capacity.
Office Class Breakdown
| Class |
Inventory (sf) |
Sublet Vacant (sf) |
Direct Vacant (sf) |
Overall Vacancy Rate |
Net Absorption (sf) |
YTD Net Absorption (sf) |
Leasing Activity (sf) |
Under Construction (sf) |
Average Asking Rent (All Classes) |
Average Asking Rent (Class A) |
| Class A |
59,558,009 |
636,194 |
2,880,683 |
5.9% |
622,801 |
622,801 |
1,948,615 |
2,428,333 |
$81.92 |
$81.92 |
| Class B |
16,183,496 |
118,657 |
933,926 |
6.5% |
158,683 |
158,683 |
280,302 |
0 |
$67.72 |
$67.72 |
| Class C |
7,449,562 |
38,958 |
175,290 |
2.9% |
48,047 |
48,047 |
43,518 |
0 |
$68.83 |
$68.83 |
Summary of Key Trends
- Leasing activity was highly active, with new leases totaling 2.3 msf.
- Vacancy rates declined significantly, reaching a 10-year low of 5.8%.
- Rents continued to rise, with the citywide average reaching $77.26 psf, up 8.2% YOY.
- Class A rents saw the strongest growth, hitting $81.92 psf.
- Pre-leasing for large blocks is on the rise, with tenants committing to spaces before entitlement.
- Investment activity remained strong, with several high-value transactions.
- Construction pipeline is substantial, but delivery is spread out over several years.
- Large block demand is outpacing supply, with only limited options available for tenants.
