San Francisco Office Rents

Fueled by tech company growth, San Francisco office rents rose sharply in

the second quarter and vacancies decreased, vaulting the city to the

leading spot in an otherwise-tepid national office market, according to

three separate research reports this week.

   “San Francisco jumped to the No. 1 position in the country” for office

real estate performance, said Colin Yasukochi, vice president of research

at Jones Lang LaSalle and author of one of the reports. “Technology

companies are the underlying driving force in the San Francisco market.

It’s recovering very quickly” from the economic downturn.

   He shows the city’s average asking office rent at $40.06 per square foot,

up from $33.71 a year ago.

   Over the past four quarters, about 1.3 million square feet of space was

absorbed by tenants, “the best four quarters since 2008, which was the

peak of the market,” Yasukochi said. While the vacancy rate overall is

still a relatively high 16.2 percent, in hot neighborhoods such as South

of Market, it’s only 6.9 percent, he said.

   Chris Macke, senior real estate strategist for research firm CoStar Group

in Washington, agreed that San Francisco is bouncing back.

   “You folks have seen steady rental-rate increases for effectively every

quarter since early 2010, whereas nationally they’re still having

rental-rate decreases,” he said. “In the second quarter, San Francisco had

the largest rental-rate increases, going up 4.4 percent compared to the

first quarter. That’s very, very strong, far better than anywhere else in

the country.”

   Part of the dynamic is that San Francisco tends to be volatile, as supply

is constrained for the most sought-after, higher-quality “creative”

spaces. “It’s a market that is prone to greater increases and decreases;

it acts like a tightly wound rubber band,” Macke said. Bright outlook

   The San Francisco metropolitan area, which includes San Mateo County, was

also on top for rent increases between the first and second quarter in a

report from research firm Reis.

   “I think the outlook for San Francisco is relatively bright,” said Ryan

Severino, an economist at Reis. “We expect to see fairly robust rent

growth there this year.” Both Oakland and San Jose metro areas also are

benefiting from increased office demand, Reis found. It ranked San Jose

fourth in the nation for rent increases and the East Bay ninth.

   Tech firms increasingly are branching out from SoMa into downtown,

previously the domain of more traditional companies. ‘The hustle and

bustle’

   “We like the hustle and bustle of the Financial District,” said Alex Mehr,

co-founder and co-CEO of online dating site Zoosk Inc., which signed a

lease in the second quarter for 21,391 square feet at 475 Sansome St. It

already was subletting the space from Yahoo.

   “Software companies prefer SoMa because they hire a lot of Java developers

who live in the South Bay and so (being near) Caltrain is an advantage,”

Mehr said. “But we’re a Web company and our developers live in San

Francisco, so the Financial District is a much easier commute for them.”

   Zoosk went from about 20 employees 18 months ago to almost 90 now. Mehr

expects the staff to double annually, so the company will soon outgrow its

current location. Rising rents don’t concern him too much. In the heart of

the city

   “The advantage of being in the heart of San Francisco with quick access to

BART and having all that action all around us outweighs any increase in

prices,” he said.

   Meade Boutwell, senior vice president with broker CB Richard Ellis,

recently represented a downtown building that remodeled a

3,000-square-foot space specifically to lure tech tenants.

   “The Mills Building at 220 Montgomery is one of the oldest buildings

downtown, it’s a classic that survived the 1906 earthquake,” he said.

“It’s class B space with traditional dropped ceilings. We tore out the

ceilings, exposed the raw concrete, brick and piping, which made it very

creative-looking. The tech tenants that all wanted SoMa in 2000 said they

loved the feeling of the space; we had nine offers.” A tech company leased

the space for $41 per square foot, a premium from its $35 asking price.

Now the owner plans to do a similar rehab elsewhere in the building.

   Executives at Starwood Property Trust, a real estate investment trust

based in San Francisco, said they are bullish on the city.

   “San Francisco has held up better than most markets,” said Chris Tokarski,

managing director and chief credit officer. “In particular the tech growth

is creating more pressure and space is leasing up quicker. You can say

that about apartments, retail and office. It clearly is seeing growth on

all fronts.”

Original article via The San Francisco Chronicle

E-mail Carolyn Said at csaid@sfchronicle.com. ———————————————————————-
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