IRR-San Francisco Mid-Year Viewpoint 2015 Local Market Report - Office
The San Francisco office market has steadily improved over the past four years and remains one of the most desirable office markets in the country, if not the world. Tenant demand remains high, with brokerage firms reporting current tenant requirements generally consistent with the prior year, despite strong net absorption figures over the past 12 months and persistent upward trends in rental rates. The difference in the current market environment comes on the supply side as there is a dearth of good quality vacant office space in San Francisco.
While there is roughly 3.1 million square feet of new office product currently under construction in San Francisco, the majority of this space is pre-leased and new construction is expected to provide only minimal relief. Beyond projects currently under construction or approved, the amount and timing of future new office deliveries remain in question due to existing zoning ordinances.
Given the persistent high demand for office space and limited supply, achievable rental rates continue to climb in San Francisco. Most market participants anticipate at least a plateauing of rents at some point in the relative near-term, if not a correction of some kind. However, thus far the market has born no signs of leveling off and investors continue to underwrite above-CPI rent growth in the first two to three years of a typical 10-year holding period. It is worth noting that some relief may come from the sublease market, which has been growing in recent months as several large technology firms who gobbled up large blocks of space earlier in the current upcycle to take advantage of lower rents are beginning to offer space for sublease. Most such firms claim that this was part of their original plan as they can now sublease space at a profit, helping cash flow in the near-term while playing out their growth strategy and eventually growing into the space they are currently putting on the sublease market. Nonetheless, there are some concerns that many tenants simply took too much space. Potential M&A activity (such as Microsoft’s potential purchase of salesforce, which is one of the city’s largest tenants and certainly the most active in the past 3-4 years) would likely result in further additions to the sublease market.
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IRR Mid-Year Viewpoint 2015 comprises a National Overview report and 300+ two-page Local Market Reports for all key property types as well as additional resources, including metrics methodology, graphs, and tables; these free reports may be downloaded from IRR’s site here.