In a nutshell, rents continue to rise and vacancy to decrease throughout San Francisco submarkets.
• Overall vacancy is down to 16.5% from 17.4% in Q4 2010, with available space also down to 12.9 million SF from 13.2 million in Q4 2010. Class A rates stand at $35.71/SF/Yr, and Class B now $28.72. Absorption quadrupled to 625,000 SF this period, from positive 161,000 SF last quarter.
• February unemployment numbers are slightly better, at 9.1% in February, from 10.4% in early December.
• South of Market (SOMA) tech tenants continue to gulp up inventory, with certain buildings increasing rates as much as 25-35% from last quarter. One Class A building near the Ballpark just hit $45.00/SF/Yr + electrical as an asking rate. The only new construction is Shorenstein’s topping out of 120 Howard/aka 188 Spear with 4 additional stories, totalling 70,000 SF–and that won’t be ready for tenant improvements until 3/2012. With over 500 tech tenants in SF now, this niche partitioning will not abate. It’s a leasing frenzy especially for small to medium-sized spaces (2,000-15,000 sf) .
• Large tech companies are also compromised in their space searches, with big moves influencing neighborhoods–witness the recent Salesforce.com land purchase of 14 acres to build out its campus in Mission Bay. But it’s Twitter’s potential move to 1355 Market–forecasting to hire 3,000 employees by 2014– that will have the biggest impact, transforming that generally seedy area into one hot neighborhood in under 3 years: a transportation hub with new cultural, retail, and residential projects such as City Center; ACT”s potential building; apartments from Trinity and Crescent Heights developments; plus a payroll tax breaks for employers in the area.
• Other neighborhood makeovers to watch now:
√ North Waterfront because of the cruise terminal at Pier 27 scheduled to start in 2012; because of America’s Cup at Piers 27-32 in 2013 (and other races in 2012); and because of the Exploratorium’s 9 acre, 230,000 SF museum at Pier 15 and 17 slated to open 2013.
√ Anywhere a new hospital is going. Over 1100 new beds will be delivered, whatever form health care reform ultimately takes: 285 beds at SF General to open 2015 and 289 at UCSF Medical Center at Mission Bay, to complete 2014. CPMC’s new medical center at Van Ness/Post is in planning for 555 beds plus a new medical office building.
• Investment sales are too numerous for this post, but include 500 Terry Francois; 1355 Market; 530 Bush; 200 California; 250 Brannan; 560 Pacific; 625 Third;550 Kearny. Grubb & Ellis’ national research department just released national investment trends which showed “ …the dollar volume of direct investment in commercial properties soared by 77 percent in the first quarter of 2011 compared with the first quarter of 2010. ” San Francisco sales seem to be either well-located, stabilized assets at prices exceeding expectation (i.e., Sobrato’s 500 Terry Francois purchase for $325/SF, plus full tenant improvements from shell condition) or not so well-located, underperforming assets at low pricing (i.e. Shorenstein’s purchase of the million-square foot ex-Furniture Mart at 1355 Market for less than $100/foot – but that doesn’t count extensive infrastructure work required). For both marketed and off-market properties in the mix now, there are beaucoup suitors vying for top position.
• Owners and tenant need to carefully follow the repercussions to the recent new law passed by Mayor Lee that requires owners to file an energy benchmark report and to conduct more extensive energy audits every five years. Under the measure, starting in October of 2011, owners of commercial properties that are larger than 50,000 square feet must file an annual report summarizing the energy performance of their buildings. Similar reporting requirements for commercial buildings ranging from 10,000 square feet to just under 50,000 square feet roll out through 2013.
• Also watch new laws tightening ADA compliance, to be implemented on the state level by March 2012. This will most affect the retail, medical, and hospitality sectors, however.
• Full into 2nd quarter now, we will be tracking other factors influencing our market: redevelopment uncertainties until early summer; local, state, national, and international political and economic uncertainty; inflation possibilities; and a slow broad-based employment recovery. For a full report from Grubb & Ellis’ SF research department, click here, and for a snapshot of statistics, click here.
