Office Space
by Greg Fogg
Investors are expressing confidence in the future of San Francisco’s office market—so much so that their pent up demand for product, coupled with rising interest rates, has resulted in a flurry of offerings. In fact, there is currently more inventory for sale in the downtown office market than at any other time in the past twenty years.
Almost everyone, tenants and owners alike, has observed that San Francisco rents are at historical lows and, more importantly, that they are beginning to rise. Investors have thus reasoned that assets have some place in cash flow. These assets can carry them through the next few years and will stand to benefit from sharply different fundamentals in the 2007-plus time-frame. For this reason, the offerings that garner the greatest value are those having rental stability over the near term. The immediate uncertainty of the next 12 to 24 months perpetuates the large spread between assets with current leasing risk and assets that push the risk out to 2007 and beyond.
Class A financial district view space and smaller spaces (less than 10,000 square feet) have been the first to benefit from the improved leasing market. BT Commerical’s office report, shows that vacancies have decreased almost across the board from one sub market to the next, albeit modestly in some cases. Average asking rental rates are beginning to appreciate in most sub markets. With several projects still offering large amounts of space for lease at steeply discounted rates, overall downtown market rates will not show a significant rise during the course of 2004.
Vacancy Rates and Asking Rents
Nonetheless, demand by office tenants continues to increase, with a positive net absorption of over 450,000 square feet in the second quarter. This brings the annual number to just over 750,000 square feet. As vacated space comes to market later this year, we expect this number to settle down and remain below 1,000,000 square feet for the year. During the second quarter of 2004 several large transactions occurred. These included: Omnicom for 121,593 square feet at 555 Market Street; Cooley Godward for 90,000 square feet at 101 California Street; Sharper Image for 71,521 square feet at Hills Plaza; and Gallagher Insurance for 53,000 square feet at One Market Plaza. Note that, once again, in the second quarter most of the large deals occurred in class A financial district buildings. One last positive sign is Wells Fargo Bank’s recent decision to acquire two major assets—333 Market Street and 550 California Street. This bank’s continued absorption of San Francisco office space not only impacts market fundamentals, it also demonstrates continued confidence in the San Francisco market by a major corporate user.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Greg Fogg is a managing partner at BT Commercial, specializing in real estate representation of both landlords and tenants in negotiating office lease transactions. He can be reached at 415-781-8100 or at gfogg@btcommercial.com. Copyright © 2004.