San Francisco Office Market

San Francisco’s Vacancy Decreases to 6.1%
Net Absorption Positive 1,985,062 SF in the Quarter

The San Francisco Office market ended the second quarter 2018 with a vacancy rate of 6.1%. The vacancy rate was down over the previous quarter, with net absorption totaling positive 1,985,062 square feet in the second quarter. Vacant sublease space increased in the quarter, ending the quarter at 1,517,292 square feet. Rental rates ended the second quarter at $59.50, a decrease over the previous quarter.

A total of five buildings delivered to the market in the quarter totaling 1,046,864 square feet, with 8,556,556 square feet still under construction at the end of the quarter.

Absorption

Net absorption for the overall San Francisco office market was positive 1,985,062 square feet in the second quarter 2018. That compares to positive 1,719,501 square feet in the first quarter 2018, positive 422,554 square feet in the fourth quarter 2017, and negative (146,217) square feet in the third
quarter 2017.

Tenants moving out of large blocks of space in 2018 include: California Casualty Management Co. moving out of 92,989 square feet at 1900 Alameda De Las Pulgas; Tesla Energy moving out of 68,025 square feet at 3055 Clearview Way-Bldg C; and Triton Container moving out of 54,400
square feet at 55 Green St.

Tenants moving into large blocks of space in 2018 include: Salesforce.com, Inc. moving into 609,018 square feet at Salesforce Tower; Facebook moving into 432,000 square feet at 181 Fremont; and Facebook moving into 252,000 square feet at 100 Independence Dr.

The Class-A office market recorded net absorption of positive 1,699,338 square feet in the second quarter 2018, compared to positive 1,739,546 square feet in the first quarter 2018, positive 34,761 in the fourth quarter 2017, and positive 32,297 in the third quarter 2017.

The Class-B office market recorded net absorption of positive 288,253 square feet in the second quarter 2018, compared to negative (112,834) square feet in the first quarter 2018, positive 322,601 in the fourth quarter 2017, and negative (153,199) in the third quarter 2017.

The Class-C office market recorded net absorption of negative (2,529) square feet in the second quarter 2018 compared to positive 92,789 square feet in the first quarter 2018, positive 65,192 in the fourth quarter 2017, and negative
(25,315) in the third quarter 2017.

Net absorption for San Francisco’s central business district was positive 1,223,356 square feet in the second quarter 2018. That compares to positive 1,803,461 square feet in the first quarter 2018, negative (19,130) in the fourth quarter 2017, and negative (107,806) in the third quarter 2017.

Net absorption for the suburban markets was positive 761,706 square feet in the second quarter 2018. That compares to negative (83,960) square feet in first quarter 2018, positive 441,684 in the fourth quarter 2017, and negative (38,411) in the third quarter 2017.

Vacancy

The office vacancy rate in the San Francisco market area decreased to 6.1% at the end of the second quarter 2018. The vacancy rate was 6.8% at the end of the first quarter 2018, 6.8% at the end of the fourth quarter 2017, and 7.0% at the end of the third quarter 2017.

Class-A projects reported a vacancy rate of 6.9% at the end of the second quarter 2018, 8.0% at the end of the first quarter 2018, 8.0% at the end of the fourth quarter 2017, and 8.0% at the end of the third quarter 2017.

Class-B projects reported a vacancy rate of 6.2% at the end of the second quarter 2018, 6.8% at the end of the first quarter 2018, 6.5% at the end of the fourth quarter 2017, and 6.9% at the end of the third quarter 2017.

Class-C projects reported a vacancy rate of 3.1% at the end of the second quarter 2018, 3.1% at the end of first quarter 2018, 3.4% at the end of the fourth quarter 2017, and 3.7% at the end of the third quarter 2017.

The overall vacancy rate in San Francisco’s central business district at the end of the second quarter 2018 decreased to 6.7%. The vacancy rate was 8.1% at the end of the first quarter 2018, 8.3% at the end of the fourth quarter 2017, and 8.3% at the end of the third quarter 2017.

The vacancy rate in the suburban markets decreased to 5.8% in the second quarter 2018. The vacancy rate was 6.1% at the end of the first quarter 2018, 6.0% at the end of the fourth quarter 2017, and 6.4% at the end of the third quarter 2017.

Largest Lease Signings

The largest lease signings occurring in 2018 included: the 763,102-square-foot lease signed by Facebook at Park Tower At Transbay in the SF Downtown Core market; the 381,517-square-foot deal signed by Cruise Automation at 301-345 Brannan Street in the SF Downtown Core market; and the 278,545-square-foot deal signed by WeWork at Union Bank in the SF Downtown Core market;.

Sublease Vacancy

The amount of vacant sublease space in the San Francisco market increased to 1,517,292 square feet by the end of the second quarter 2018, from 1,452,608 square feet at the end of the first quarter 2018. There was 1,607,988 square feet vacant at the end of the fourth quarter 2017 and 1,647,772 square feet at the end of the third quarter 2017.

San Francisco’s Class-A projects reported vacant sublease space of 751,777 square feet at the end of second quarter 2018, up from the 736,674 square feet reported at the end of the first quarter 2018. There were 741,473 square feet of sublease space vacant at the end of the fourth quarter 2017, and 793,039 square feet at the end of the third quarter 2017.

Class-B projects reported vacant sublease space of 685,932 square feet at the end of the second quarter 2018, up from the 640,469 square feet reported at the end of the first quarter 2018. At the end of the fourth quarter 2017 there were 780,221 square feet, and at the end of the third quarter 2017
there were 810,253 square feet vacant.

Class-C projects reported increased vacant sublease space from the first quarter 2018 to the second quarter 2018. Sublease vacancy went from 75,465 square feet to 79,583 square feet during that time. There was 86,294 square feet at the end of the fourth quarter 2017, and 44,480 square feet at the end of the third quarter 2017.

Sublease vacancy in San Francisco’s central business district stood at 571,986 square feet at the end of the second quarter 2018. It was 508,301 square feet at the end of the first quarter 2018, 519,531 square feet at the end of the fourth quarter 2017, and 541,666 square feet at the end of the third
quarter 2017.

Sublease vacancy in the suburban markets ended the second quarter 2018 at 945,306 square feet. At the end of the first quarter 2018 sublease vacancy was 944,307 square feet, was 1,088,457 square feet at the end of the fourth quarter 2017, and was 1,106,106 square feet at the end of the third quarter 2017.

Rental Rates

The average quoted asking rental rate for available office space, all classes, was $59.50 per square foot per year at the end of the second quarter 2018 in the San Francisco market area. This represented a 0.9% decrease in quoted rental rates from the end of the first quarter 2018, when rents were reported at $60.04 per square foot.

The average quoted rate within the Class-A sector was $62.38 at the end of the second quarter 2018, while Class-B rates stood at $58.25, and Class-C rates at $48.97. At the end of the first quarter 2018, Class-A rates were $63.40 per square foot, Class-B rates were $58.48, and Class-C rates were
$47.99.

The average quoted asking rental rate in San Francisco’s CBD was $63.52 at the end of the second quarter 2018, and $58.79 in the suburban markets. In the first quarter 2018, quoted rates were $64.08 in the CBD and $59.33 in the suburbs.

Deliveries and Construction

During the second quarter 2018, five buildings totaling 1,046,864 square feet were completed in the San Francisco market area. This compares to six buildings totaling 1,969,442 square feet that were completed in the first quarter 2018, one building totaling 2,000 square feet completed in the fourth quarter 2017, and 275,922 square feet in two buildings completed in the third quarter 2017.

There was 8,556,556 square feet of office space under construction at the end of the second quarter 2018.

Some of the notable 2018 deliveries include: Salesforce Tower, a 1,400,000-square-foot facility that delivered in first quarter 2018 and is now 96% occupied, and 350 Bush St, a 447,000-square-foot building that delivered in first quarter 2018 and is now 99% occupied. The largest projects underway at the end of second quarter 2018 were First Street Tower, a 1,250,000-square-foot building with 23% of its space pre-leased, and Park Tower At Transbay, a 772,960-square-foot facility that is 99% preleased.

Inventory

Total office inventory in the San Francisco market area amounted to 171,624,815 square feet in 3,916 buildings as of the end of the second quarter 2018. The Class-A office sector consisted of 81,703,249 square feet in 319 projects. There were 1,509 Class-B buildings totaling 66,109,412 square feet, and the Class-C sector consisted of 23,812,154 square feet in 2,088 buildings. Within the Office market there were 204 owner-occupied buildings accounting for 19,963,730 square feet of office space.

Sales Activity

Tallying office building sales of 15,000 square feet or larger, San Francisco office sales figures fell during the first quarter 2018 in terms of dollar volume compared to the fourth quarter of 2017.

In the first quarter, 12 office transactions closed with a total volume of $551,850,000. The 12 buildings totaled 806,857 square feet and the average price per square foot equated to $683.95 per square foot. That compares to 14 transactions totaling $615,391,000 in the fourth quarter 2017. The total square footage in the fourth quarter was 1,097,652 square feet for an average price per square foot of $560.64.

Total office building sales activity in 2018 was down compared to 2017. In the first three months of 2018, the market saw 12 office sales transactions with a total volume of $551,850,000. The price per square foot averaged $683.95. In the same first three months of 2017, the market posted 11 transactions with a total volume of 1,501,433,500. The price per square foot averaged $635.65.
Cap rates have been higher in 2018, averaging 6.21% compared to the same period in 2017 when they averaged 5.57%.
One of the largest transactions that has occurred within the last four quarters in the San Francisco market is the sale of 101 Mission St in San Francisco. This 206,455-square-foot office building sold for $163,250, or $790.73 per square foot. The property sold on 6/19/2018, at a 4.5% cap rate.”