WESTERN SNAPSHOT, FEBRUARY 2011

San Francisco Office Market

The strong technology sector led the overall San Francisco office market to demonstrate increased asking rates, decreased vacancy rates and positive net absorption for 2010. In the past, San Francisco’s leasing market was primarily driven by the financial and professional-services sectors. This trend is changing, however, as corporate investment in hardware and software continues to grow and new technology markets in gaming and social media explode, fueling material growth of this San Francisco sector.

The City by the Bay enjoyed increased occupancy for the third straight quarter as 229,695 square feet of office space was absorbed in fourth quarter 2010; the total net absorption for the year was a positive 761,567 square feet; the overall vacancy rate also dropped from 14.84 to 14.25 percent. As absorption increased, so did rental rates: the average asking rate for Class A space increased from $34.78 to $36.69 per square foot during the year.

The continued, albeit modest, improvement of office market fundamentals has prompted tenants to preemptively negotiate early renewals and expansions to realize anticipated cost savings. This is especially true for the South of Market (SOMA) submarkets, which recorded 777,706 square feet of positive net absorption in 2010. SOMA is the most popular location for San Francisco’s technology, internet gaming, social media and internet marketing companies.

In the largest transaction of the quarter, CNET Networks Inc. (CBS) executed a 285,000-square-foot early renewal/ blend-and-extend move at 235 Second Street along the Second Street Corridor in the SOMA submarket. This was a win-win transaction as the new lease reduced CNET’s existing rent and the landlord will keep a credit tenant in the building long-term.

Continued investment in technology, both from the corporate and the venture capital community, should bode well for overall leasing velocity in San Francisco in 2011. The view here is that this growth in San Francisco’s technology sector will also catalyze other industry segments, including supporting professional services sectors such as accounting, advertising, legal and financial services.

Bryan Courson is a senior vice president and manager of the Cornish & Carey Commercial Newmark Knight Frank San Francisco office.

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