S.F. office leasing boom smashes record

181 Fremont could offer alternatives in tight market

San Francisco’s office market logged 1.4 million square feet of positive net absorption in 2013 — an unprecedented third year in a row in which the amount of leased downtown space grew by more than 1 million square feet, according to Jones Lang LaSalle.

Over the last three years San Francisco office tenants have leased 4.7 million square feet more than they have given up, enough space to accommodate more than 25,000 new workers. In 2011, the city logged 1.8 million square feet of positive absorption and last year added another 1.6 million square feet.

Rents have now increased 69.4 percent since the market bottomed out in the first quarter of 2010, according to JLL, and rents and Mid-Market and SoMa have grown 95 percent during that time.

Citywide average asking rates grew by 1.4 percent from last quarter to $56.88, up 10.3 percent year-over-year, while total vacancy declined only slightly to 11.1 percent as a result of new product coming online.
Big deals in the fourth quarter included: Visa’s decision to move its tech group into 111,000 square feet; Neustar’s 108,000-square-foot deal at Foundry Square III; and Esurance’s 91,000 square foot deal at Golden Gate Commons. Mission Bay, which lagged behind the rest of the market in 2011 and 2012, caught fire in 2013, with Illumina, Centage, and Medivation all signing leases in the neighborhood’s two long-empty buildings, 499 Illinois St. and 500 Terry Francois Blvd.

There is no sign of a slowdown with Trulia, Pinterest, Dropbox, Marin Software and UCSF all in the market for big blocks of space. Total net absorption for the fourth quarter came in at 582,771 square feet, the greatest single quarter of positive net absorption since Q2 of 2012.
Wes Powell, a managing director with JLL, said he thinks the momentum from 2013 will spill over into the first quarter of this year.
“There are more big tenants in the marketplace than there are spaces available,” he said. “I think you are going to see a host of deals signed in Q1.”
While tech firms continue to be responsible for the vast majority of growth, Powell said that could change this year.
“We have seen flat absorption from non-tech tenants so far, but if the overall economy continues to improve, it’s not inconceivable that the traditional, non-tech market could grow by 5 percent,” he said. “If that happens, it is going to get very tight for tenants.”

Some relief is on the way however. While two of the buildings currently under construction have been fully leased — Foundry Square III and 350 Mission — others spec developments have yet to land tenants. These include 222 Second St., 181 Fremont St., 535 Mission St. and the Transbay Tower.

J.K. Dineen
Reporter-
San Francisco Business Times
J.K. Dineen covers real estate for the San Francisco Business Times.