Office Space
by Greg Fogg
At the close of the third quarter of 2005, San Francisco's office market continues to show strong demand, with a year-to-date net absorption of 1,855,857 square feet. Overall, vacancy is down by more than 3 percentage points thus far in 2005, from 16.3% at the end of 2004 to 13.1%. Accordingly, asking rents continue to trend upward, showing an increase of more than 10% in 2005 (from $26.14 at the end of 2004 to $28.86 at the close of the third quarter).
Meanwhile, dramatic price increases associated with class-A view space (in some cases up more than 50% year-over-year) and continued building-sales activity (most notably, The Karasick Group's potential sale of the Bank of America complex to Hudson Waterfront Associates, a group of Hong Kong investors, for a reputed $1.2 billion) have captured the headlines.
Yes, investment sales pricing is at a record high. Yes, class-A view space commands a significant premium. And yes, the overall market is trending in favor of landlords with increasing rents and more limited concessions. However, the fact remains that a large percentage of the vacant inventory is not class-A view space, creating a bifurcated market. In the financial district, available class-A view space comprises about 1 million square feet, or approximately 2.5% of the total class-A financial district market. Understandably, this segment would appreciate rapidly. On the other hand, nonview commodity space is still plentiful (over 4 million square feet or 10.5%) and often sits on the market for 18 months or longer. Since tenants still have a lot of choices here, there is ample opportunity to negotiate attractive economic terms. These landlords will compete for good tenants.
As the year comes to a close, we expect to see the net-absorption number trail off due to new availabilities created by tenants moving out. We also expect to see continued upward pressure on rental rates, yet the actual pace of rent growth in the commodity space market will be slow. But there is no question that the San Francisco market will head into 2006 poised for an increasingly rapid shift in underlying leverage that favors landlords.
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 NAI 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 gfogg@naibtcommercial.com. Copyright © 2005 by the San Francisco Apartment Magazine. All rights reserved.