Office Space

by Greg Fogg

Are the streets a little more crowded? Commute a little longer? Are we reliving the boom of 1999-2000? Maybe. Positive net absorption was nearly one-million rentable-square feet (rsf)—more specifically 948,255 rsf for this first quarter of 2005 on gross activity of 3,100,744 rsf, comprising 400 lease transactions. More than one-third of all leasing activity represented a net increase in occupied space—that’s like another 4,700 people coming to work every day in San Francisco. No wonder our city seems a bit more crowded. If you recall, the total positive net absorption for all of 2004 was just over 1,400,000 rsf. Historically, over one-million rsf of net absorption is a good year in San Francisco’s real-estate market. So it looks like 1999 all over again. Vacancies have dropped again this quarter, this time by nearly 2% to 14.6%, while average asking rental rates in the North and South Financial Districts have climbed to over $30 per rsf per year. In top-tier Class A office buildings, we are seeing deals struck, starting in the $50 range per rsf per year. Are we on the cusp of another dot-com leasing boom or is this activity just a fluke?

This activity can be attributed to a handful of large lease transactions completed during this first quarter. The most significant was the 270,000 rsf lease by the city of San Francisco/MTA at 1 South Van Ness. In addition, there were significant leases by the following groups: Heller Erhman White & McAuliffe leased 250,000 rsf (part renewal, part expansion) at 333 Bush Street; Hanson Bridgett Marcus leased 79,120 rsf at 425 Market Street; SBC Communications leased 67,829 rsf at 525 Market Street; and Chubb Group leased 50,192 rsf at 2 Embarcadero Center.

Many of the big leases signed in 2000 have come up for renewal, so tenants are taking full advantage of current market rates (now substantially lower than those from five years ago). In addition, many of the businesses that were shut out of San Francisco during the dot-com boom because they could not afford the rents, are now back in the market in droves. These include companies such as Gymboree Corporation, which relocated its headquarters from Burlingame to San Francisco.

The job market in San Francisco has improved as unemployment has dropped one-tenth of 1% since the beginning of the year, but this figure does not substantiate the current market activity. We suspect that substantial hiring will follow this spurt in leasing activity.

Keeping up with last year’s pace, there is still significant trading in Class A office buildings. Here are some of the highlights: 50 Beale Street (641,328 rsf) sold for $150 million or $234/sf; 333 Market Street (596,000 rsf) sold for $150 million or $252/sf; 160 Spear Street (280,085 rsf) sold for $57 million or $204/sf; and 1 Market Street (The Landmark Building 383,065 rsf) sold for $190 million. The following spaces sold for an undisclosed amount: 123 Mission (342,000 rsf); 505 Montgomery Street (329,732 rsf); and 300 Beale Street (293,800 rsf). There will certainly be more trading activity like this in the months to come.

Last, the office inventory in San Francisco has shrunk by 1% in the past year due to the trend for older office buildings to be converted to housing. A handful of properties have been removed from office inventory including the following properties: 690 Market Street, 1 South Park Avenue, and 150 Powell Street.

Unemployment Rates

The unemployment rate in San Francisco County was 5.2% for the first quarter of 2005, 20 basis points higher than 5.0% in the fourth quarter of 2004. In comparison, California dropped 40 basis points to 5.4% unemployment for the same reporting period, while the U.S. average declined 20 basis points to 5.2%. The state unemployment rate has declined in each of the last four quarters, while the U.S. average posted declines over the past seven quarters. All three unemployment rates are down from the same reporting period a year ago.

The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of SFAA or the San Francisco Apartment Magazine. Greg Fogg is a managing partner at BT Commercial, specializing in real-estate representation of both landlords and tenants in negotiating office-lease transactions. He can be reached at 415-781-8100 or gfogg@btcommercial.com.