WESTERN SNAPSHOT, JANUARY 2007

San Francisco Office Market

Coming off of a 2 million-square-foot net absorption in 2005, it appears that San Francisco ended 2006 with approximately 600,000 square feet of net absorption. Absorption of 600,000 to 800,000 square feet is considered a normal range for San Francisco during the last 20 years and may indicate that the market is back on a stable platform after a hectic year in 2005.

San Francisco is a mature marketplace with little room to expand. A good percentage of net absorption last year occurred because of the conversion of office buildings to residential condos. Taking this sector out of last year’s figures, San Francisco saw true office market absorption of closer to 1.2 million square feet — still a very strong market for San Francisco standards. The City by the Bay saw a slight downturn in the first two quarters of last year and actually had negative absorption finishing the first half of 2006. This slowdown was partly a result of a flurry of deals at the end of 2005 that may have impacted these numbers in the first and second quarters of 2006.

Rental rates saw a significant jump in 2006. Class A office space ended 2005 at $28.95 cents per square foot on average. In 2006, rental rents for Class A office space averaged $33.95 cents per square foot fully serviced.

Concessions and tenant-improvement allowances are also on the decline. Average tenant-improvement allowances in Class A properties now stand at $20 to $25 per square foot on new 5-year terms for secondary type spaces and $50 per square foot for spaces in shell condition. Free rent concessions are being held to less than 3 months on average.

New buyers are also entering the San Francisco office market. Boston-based Beacon Capital Partners has quickly become one of the largest landlords in the city with its recent purchase of 100 First Street and 100 California Street.

The largest lease deals include Wells Fargo Bank expanding into an additional 55,300 square feet at 45 Fremont Street; Quinn Emanuel Urquhart Oliver and Herges LLP leasing 38,772 square feet at 50 California Street; San Francisco Bar Association taking 23,602 square feet at the Old Federal Reserve Bank; and the Smith Group taking 34,206 square feet in the same building.

San Francisco is still seeing interest from biotech firms looking to enter the hot biotech corridor in Mission Bay. One of the largest office parks in San Francisco, 185 Berry Street announced that it would be starting construction on a 200,000-square-foot expansion of the property to accommodate this rapid growth sector.

Technology startups are also making a comeback. Unlike the dot-com boom, these firms are looking for short-term leases and are much more cautious in spending a lot of money upfront on their improvements. This new boom has already lowered vacancy rates in the South of Market area to single digits for the first time since 2001.

Overall in 2007, San Francisco should continue to be a very stable office market with a potential shortage of space in the core financial district, particularly for spaces less than 5,000 square feet.

Hans Hansson is the managing principal of Starboard Commercial Real Estate/TCN Worldwide in San Francisco.


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