San Francisco’s Office-Tech Craze: Investors Finally Have a Shot at the Nation’s Top Office Market
Commercial real estate investors have been itching to get into the SoMa submarket of San Francisco’s central business district (CBD) for some time now, but opportunities have been few and far between.
San Francisco, especially its South of Market (SoMa) submarket, is red hot and considered by many to be the nation’s No. 1 office market. And while SoMa has been on many investors’ hit lists, there hasn’t been much available inventory to quench their thirst — that is, until now.
In recent weeks, several creative and tech-oriented buildings have come to market in SoMa, attracting buyers from all over the world, both institutional and private.
“Now is a very good time to join the tech revolution in San Francisco’s desirable CBD, where investors are finally getting opportunities to invest in the country’s top office market,” according to Gordon Smith, commercial real estate division GM for Ten-X Commercial, a leading online real estate marketplace that specializes in bringing buyers and sellers together to transact commercial real estate. “Our data shows plenty of pent-up demand for tech-oriented office properties in this submarket.”
San Francisco stands as the top office market investors should consider zeroing in on, according to Ten-X Research’s most recent Office Market outlook report — a long-term forecast that reveals the top markets where investors should consider buying and selling. Despite a strong construction pipeline through 2018, continued robust tenant demand in San Francisco is expected to constrain leasing availability, pulling city-wide vacancy rates to the low 9-percent range by 2018, according to Ten-X Research.
Toward the end of 2015, rents were up and vacancies were down in San Francisco, thanks to a hot local economy that surpassed its 1990s dot-com peak to a new record high (surpassing 4.5-percent year-over-year growth). Even non-tech professional/business sectors continue posting excellent employment gains and seasonally adjusted unemployment trends well below the national average.
SoMa’s South Financial District in particular is experiencing historically low office vacancy rates — currently at 7 percent — down 160 bps from a year ago and far below its 2010 peak of 13.1 percent. Effective rents are at an all-time peak and rising over the past four quarters, according to Ten-X Research. JLL pegs the overall CBD’s average asking rent at $72.04 per square foot.
Current SoMa market activity in the tech/office category includes:
- 142 Minna Street: A fully leased and renovated creative office/retail building currently listed for $10.25 million.
- 140 New Montgomery Street: Across the street from 142 Minna and anchored by Yelp, this property recently sold for approximately $960 per square foot to Pembroke, a large institutional investor focused on trophy CBD assets around the world. Stockbridge Capital and Wilson Meany were the sellers.
- 222 2nd Street: The new LinkedIn San Francisco headquarters is currently on the market for approximately $1,200 per square foot, which would be a new pricing record for San Francisco. Tishman Speyer/JP Morgan is the seller.
- 657-667 Mission Street: Two historic buildings that are expected to be repositioned for creative tenants, with rumored pricing of approximately $75 million.
- 995 Market Street: Recently sold to Bridgeton Holdings for approximately $680 per square foot. The building is primarily leased to WeWork, with CVS on the ground floor.
- 634 2nd Street: 100% occupied by cloud computing company Okta, offered for $900 to $1,000 per square foot
- 604 Mission Street: Multi-tenant office building leased to smaller creative and technology tenants, expected to price around $575 per square foot.
Epitomizing the intersection of real estate and tech, the 142 Minna Street property is being sold via Ten-X along with brokerage firm JLL, allowing buyers and sellers to negotiate offers online[K1] . The 11,690 square foot office and retail building is fully-leased, thanks in part to nearby public transit and abundant neighborhood amenities, including the recently unveiled SFMOMA fresh off its $305 million expansion. The second floor office space was recently transformed into dramatic, creative office space ideal for modern tenants. The popular Alibi restaurant and bar has occupied the first floor since 2010 and is frequented by the neighborhood’s hip, tech-savvy workers.
“Office space is hot in San Francisco and 142 Minna is offers investors a chance to cash in on the tech boom there,” Smith said. “The property presents a rare opportunity not only because of its manageable size for smaller, more nimble investors, but also because it provides in-place cash flow to fund future leasing efforts. In other words, 142 Minna has the best of both worlds - immediate returns with a great long-term growth story.”
142 Minna is being sold by a local developer on the Ten-X Commercial platform via Offer Select, which enables online negotiation and gives buyers a true, exclusive diligence period to inspect the property before removing contingencies. It is listed for $10.25 million with a deadline of Wednesday, May 18 to submit offers.