San Francisco Office Market Q3 2018 Summary
Core Content
The San Francisco office market in Q3 2018 showed strong performance, driven by low unemployment, robust leasing activity, and rising rents. Despite limited new construction, the market remained tight, particularly for large blocks of space.
Key Economic Indicators
- San Francisco Metro Employment: Increased by 1.9% YoY to 1.0118 million.
- San Francisco Metro Unemployment: Dropped to 2.3%, down from 2.4% in July and below the year-ago figure of 3.1%.
- U.S. Unemployment: 3.9%, down from 4.4% in Q3 2017.
Market Indicators (Overall, All Classes)
- Overall Vacancy Rate: Fell to 6.8%, down 60 basis points (bps) from Q2 and 170 bps from Q3 2017.
- Net Absorption (sf): 938,000 sf in Q3, totaling 4.5 msf for the year-to-date (YTD).
- Under Construction (sf): 2.8 msf, with no new projects expected to deliver until Q1 2019.
- Average Asking Rent (All Classes): Rose to $74.72 psf, up 6.0% YoY.
- Class A Asking Rent: Reached a record high of $78.56 psf, up 8.8% YoY.
Construction & Development
- Office Construction Completions: 583,000 sf delivered in Q3, all pre-leased (Adobe at 100 Hooper Street and Stripe at 510 Townsend Street).
- Prop M Allocation Pool: 2.0 msf remaining, with an additional 875,000 sf expected in October.
- Pending Projects: 8.9 msf in development, with most located in Central SoMa.
- Central SoMa Plan: Expected to be finalized in October, which will upzone the area for increased density and development.
Leasing Activity & Absorption
- New Leasing Activity: 1.6 msf in Q3, matching the quarterly average since 2000.
- Largest Lease: PricewaterhouseCoopers signed a 197,000 sf lease at 405 Howard Street in the South Financial District.
- Active Tenant Requirements: 6.4 msf at quarter-end, up 882,000 sf YoY.
- Large Block Demand: Up 37% YoY, outpacing supply.
- Leasing Options for 2019: Only 13 options available for 100,000 sf or more, while 24 large block space requirements exist.
Investment Activity
- Sales Activity: Increased in 2018 compared to 2017, with over ten office buildings either on the market or rumored to be coming to market.
- Active Sellers: CIM Group led with three buildings on the market, including One Tehama, 274 Brannan, and 260 Townsend.
- Expected Price Trends: New dollar per square foot benchmarks are expected to be set in 2018.
Outlook
- Full Employment & In-Migration: Continued full employment and slower in-migration may lead to a worker shortage.
- Tight Big Block Market: Large block space remains in high demand with limited supply.
- Construction Delays: Developers and tenants are waiting for the Central SoMa Plan to proceed with new projects.
- Potential Relief: Sublease availabilities, especially from Uber, may provide some relief in the next year.
Submarket Performance
| Submarket |
Inventory (sf) |
Sublet Vacant (sf) |
Direct Vacant (sf) |
Overall Vacancy Rate |
Q3 Net Absorption (sf) |
YTD Net Absorption (sf) |
Q3 Leasing Activity (sf) |
Under Construction (sf) |
Avg Asking Rent (All Classes) |
Avg Asking Rent (Class A) |
| North Financial District |
26,517,916 |
353,948 |
2,198,874 |
9.6% |
253,050 |
770,955 |
2,167,644 |
0 |
$75.80 |
$79.96 |
| South Financial District |
27,524,244 |
291,449 |
1,501,320 |
6.5% |
136,703 |
1,900,360 |
2,516,418 |
1,801,500 |
$79.48 |
$80.00 |
| CBD |
54,042,160 |
645,397 |
3,700,194 |
8.0% |
389,753 |
2,671,315 |
4,684,062 |
1,801,500 |
$76.99 |
$79.97 |
| Jackson Square |
1,490,806 |
0 |
61,992 |
4.2% |
34,946 |
55,343 |
150,072 |
0 |
$64.36 |
$59.00 |
| North Waterfront |
3,238,808 |
49,793 |
222,726 |
8.4% |
-9,198 |
-87,726 |
181,375 |
0 |
$63.91 |
$71.64 |
| SOMA |
8,180,959 |
62,279 |
307,590 |
4.5% |
-14,829 |
196,536 |
956,210 |
0 |
$71.30 |
$73.88 |
| The Presidio |
1,030,627 |
0 |
8,664 |
0.8% |
0 |
0 |
7,697 |
0 |
$90.00 |
$90.00 |
| Union Square |
3,173,989 |
9,014 |
166,559 |
5.5% |
299 |
64,974 |
124,619 |
0 |
$67.61 |
$76.83 |
| Van Ness Corridor |
785,956 |
4,674 |
53,229 |
7.4% |
0 |
-36,445 |
3,459 |
0 |
$55.18 |
$59.71 |
| Showplace Square / Potrero Hill |
3,874,042 |
84,073 |
50,752 |
3.5% |
533,053 |
940,224 |
134,676 |
0 |
$65.62 |
$61.72 |
| Mission Bay |
1,771,735 |
0 |
0 |
0.0% |
0 |
715,000 |
0 |
1,023,000 |
N/A |
N/A |
Key Lease Transactions
| Property |
SF (sf) |
Tenant |
Landlord |
Transaction Type |
Submarket |
| 405 Howard Street |
197,000 |
PricewaterhouseCoopers |
Norges Bank, TH Real Estate |
Direct |
South Financial |
| 525 Market Street |
143,000 |
Confidential |
Knickerbocker Properties |
Direct |
South Financial |
| 657-667 Mission Street |
145,000 |
Unity Technologies |
Vanke Holdings |
Direct |
South Financial |
| 250 Brannan Street |
101,000 |
Splunk |
Kilroy Realty |
Direct |
SOMA |
| One Tehama Street |
98,000 |
SoFi |
CIM Group |
Direct |
South Financial |
| 345 Montgomery Street |
78,000 |
Spaces |
Vornado Realty Trust |
Direct |
North Financial |
| 1 Embarcadero Center |
54,000 |
Nixon Peabody |
Boston Properties |
Renewal |
North Financial |
Key Sale Transactions
| Property |
SF (sf) |
Buyer |
Seller |
Price / $PSF |
Submarket |
| 301 Howard Street |
319,000 |
CalSTRS/DivcoWest |
Vanbarton Group |
$293,000,000 / $918 |
South Financial |
| 1130 Market Street |
85,000 |
Rubicon Point Partners |
The Kivelstadt Group |
$49,000,000 / $576 |
Mid-Market |
| 660 Market Street |
40,100 |
Jamestown |
Sun Life Assurance |
$40,000,000 / $998 |
North Financial |
| 332 Pine Street |
45,000 |
Lincoln Property/Rockwood Capital |
Polidev Investments |
$38,000,000 / $844 |
North Financial |
Office Class Breakdown
| Class |
Inventory (sf) |
Sublet Vacant (sf) |
Direct Vacant (sf) |
Overall Vacancy Rate |
Q3 Net Absorption (sf) |
YTD Net Absorption (sf) |
Q3 Leasing Activity (sf) |
Under Construction (sf) |
Avg Asking Rent (All Classes) |
Avg Asking Rent (Class A) |
| Class A |
58,746,711 |
664,395 |
3,354,685 |
6.8% |
746,526 |
4,261,721 |
4,693,739 |
2,824,500 |
$78.56 |
$78.56 |
| Class B |
16,203,775 |
133,847 |
1,097,207 |
7.6% |
192,486 |
313,412 |
1,332,243 |
0 |
$65.84 |
$65.84 |
| Class C |
7,330,112 |
61,351 |
296,299 |
4.9% |
-1,126 |
-93,294 |
451,491 |
0 |
$64.65 |
$64.65 |
