September 2016 Commercial Market Conditions

The San Francisco commercial real estate market overall has and will continue to hold strong. However, varying dynamics in the core arenas- Multifamily, Office, Industrial and Flex-space- result in divergent takeaways.

Multifamily demand remains strong and continues to outpace supply across the market. Considering the current 4.1% vacancy rate along with better than average absorption rates and projected deliveries, we expect a momentary spike in vacancy as new units come available followed by a gradual return to historically low values as they are absorbed.

The past year’s average multifamily asking price of $446,157 and sale price of $263,140 yield a higher current deviation of $183,017 than the historical $24,103. This dynamic suggests today’s buyer is becoming more price conscious and buying lower priced units more often. Furthermore, this demand shift suggests the opportunity for multifamily development in the future will be in mid-range property as buyers choose these more reasonably priced and appointed homes.

Yearly office market averages of $55.54 gross rent per square foot, 6.2% vacancy and 6.5 Months on Market are all strong compared to their 5 year averages. In the short term as 12 month deliveries of 2,195,395 sqft come on line, absorption will drop and vacancy will increase. However, both will recover in the long term. The market for and opportunity to develop office space will both remain strong in the foreseeable future.
Industrial property has strong averages of $19.50 per square foot rental and 2.9% vacancy rates. Considering the lack of anticipated future deliveries and construction starts we anticipate increasing rents and shorter time on market. However, recent city crack downs on non-conforming use of this space and the ever increasing difficulty of running industrial business in San Francisco suggest a long term drop in inventory as it is repurposed for more lucrative uses.

The current asking rent of $40.25 for Flex-space has plateaued. Considering the 12 month absorption of this specialized space of -114,320 sqft along with future deliveries we expect that vacancy will increase and asking rent with soften slightly in the short term but recover over time.

Overall the best opportunity for commercial development resides increasingly in the multifamily and office arenas as the city grows into a residential and office-working hub of the greater bay area. Though limited opportunities still exist in Flex and Industrial development, high land value and housing pressures continue to replace these uses within San Francisco.