Facebook Inc.’s huge lease for 436,000 square feet at 181 Fremont was a big win for developer Jay Paul Co.
It also removed San Francisco’s fifth-largest block of available office space, constraining supply further in an already tight and expensive market. That’s a challenge for smaller companies that aren’t as well funded, and pushing some tenants to cheaper areas like Oakland.
Two big office projects will be completed next year and are still looking for their first tenants: Kilroy Realty Corp. (NYSE: KRC)’s The Exchange on 16th in Mission Bay, and John Buck Co., Golub and MetLife Inc. (NYSE:MET)’s Park Tower, which is 181 Fremont’s neighbor in the Transbay District. Also available is 190,000 square feet at 350 Bush St., developer Lincoln Property Co. and Gemdale’s new project in the north Financial District.
Some of the city’s older buildings have big blocks of space around 200,000 square feet opening up in the next few years, as big users like Union Bank and Blue Shield move out, according to data from brokerage Cushman & Wakefield.
After next year, there’s little new supply coming immediately. The two biggest projects, Oceanwide Center and Five Point Holdings LLC (NYSE: FPH)’s the Shipyard, total over 5 million square feet but won’t finish until the next decade. The city’s next big growth spurt is expected in Central SoMa, which the city is planning to upzone. But the office projects in that area are years from receiving approvals.
Lack of supply has pushed large tech firms like Facebook (NASDAQ: FB), Amazon.com Inc. (NASDAQ: AMZN) and Alphabet Inc.’s Google Inc. (NASDAQ: GOOG) to do major deals this year, said Robert Sammons, Cushman & Wakefield’s research director of Northern California.
“2017 is the year of the established tech firms on the hunt for large space. It has a lot to do with the feeling that there are few 100,000-square-foot blocks remaining or that will be available before the early 2020s,” he said. “If they feel they need to grow in this urban environment, it’s now or never to sign a deal.”
San Francisco’s office vacancy rate was 8.4 percent in the second quarter, and Class A rents broke $75 per square foot. Third quarter data will be finalized next week.
Prop M, the city’s annual cap on office approvals, is also looming as a barrier to new supply. The cap on office approvals will expand to just over 2 million square feet next month, but as of May, projects in the pipeline were seeking 7.4 million square feet in approvals. Unless a change is made at the ballot box, some developers will have to wait for more space to become available in the coming years.
“That weighs heavily on San Francisco right now,” said Sammons.