Office Space
by Greg Fogg
After three straight quarters of brisk activity, the San Francisco office leasing market has surpassed one million rentable square feet (RSF) of positive net absorption for 2004. At the beginning of the year, commercial real estate experts projected a sum total of 750,000 RSF of positive absorption for all of 2004. To put this into perspective, in 2003 less than 200,000 RSF was absorbed. This is better than expected news and supports the fact that the economy continues to strengthen. The State of California’s Employment Development Department predicts 1.8% job growth in both 2004 and 2005, 30% of which is in the professional and business sector that covers many office space uses.
In the third quarter, many large deals closed that impacted the San Francisco leasing market. Most notably, Sedgewick, Detert, Moran & Arnold relocated from One Embarcadero to One Market Plaza, taking 115,394 RSF. Ernst & Young subleased 64,953 RSF at 560 Mission and California Pacific Medical Center expanded 48,000 RSF at One South Van Ness. Average asking rents for San Francisco office space have increased over $1 per RSF per annum since the second quarter of 2004, a nearly 5% quarterly increase.
The investment market continues to soar with the sale of many Class A office buildings. Historically low interest rates have contributed to the abnormally high volume of sales. Most recently Hines bought two major high-rise buildings located South of Market, previously owned by the Cousins/Myers partnership. A building at 101 Second, a 387,000 RSF building, traded for $140.6 million ($363/rsf); and another at 55 Second, a 379,000 RSF building, traded for $146.4 million ($386/rsf). In addition, One South Van Ness, a 460,000-square foot Class B building, was purchased by TMG Partners from American Financial Realty Trust for approximately $38 million ($83/rsf). Most notably, Shorenstein has sold its remaining 50% interest in 555 California to the Kanasik/Werner partnership based in New York City for over $400/rsf.
The unemployment rate in San Francisco County was 5.3% for the third quarter, 60 basis points lower than the second quarter 2004 rate of 5.9%. In comparison, California recorded 5.9% unemployment for the same reporting period, while the U.S. average was 5.4%. Both state and national unemployment rates posted lower figures from than previous quarter. All three unemployment rates are down from the same reporting period a year ago.
With the tightening market, rising rental rates and newly traded office buildings, the shift toward recovery clearly continues. We are optimistic that the market will finish strong in 2004 and will be poised to move into 2005 with the same vigor.
The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of 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 by the San Francisco Apartment Magazine. All rights reserved.