Overview Effective Rent Indicator: Overall $60.97 ↑ CBD $64.44 ↑ Non CBD $57.51 ↑
San Francisco had an exciting first half of 2015 with a plethora of office leasing and capital markets activity in what has become one of the most sought after investment markets in the US. Demand continues to outpace supply citywide as vacancy remained below 6%, making it one of the tightest office leasing markets nationwide.
Overall effective rents were up within every asset class in San Francisco. Non CBD Class A buildings saw effective rents surpass the $60 PSF mark, gaining 7.5% in the past 6 months to $63.45 PSF. Class A space in the North and South Financial district also had positive gains, increasing 6% to $65 PSF over the same time period. A main contributor to the current demand for office space is higher employment numbers. The city unemployment rate improved to 3.8%, compared to 6.9% statewide and 5.7% nationally, which has employers scrambling to find more space to accommodate their growing workforces.
Leasing rates in the first few months of 2015 were relatively flat compared to where they were in the second half of 2014. While Class A and B buildings in San Francisco both had quiet starts to the year, they recently picked up to close the first half in the black. Class A effective rents are up 6.6% to $65.29 PSF over the previous 6 months and class B buildings performed even better with effective rents increasing 12% to $59.40 PSF over the same time period.
Notable Class B deals signed in the first half that helped push rents higher included IGN Entertainments 35k SF renewal at 625 2nd St in the Rincon-South Beach submarket where their effective rent will increase to the mid $70’s PSF. Planning for growth, Elance expanded by 18k SF in Lower SOMA at 475 Brannan Street signing a 4 year lease in the low $70’s PSF. Also signing in the Lower SOMA submarket was Honey Book, a software developer for event planners, at 539 Bryant where they leased 15k SF for almost $70 PSF from landlord Zurich Alternative Asset.
Class B buildings offer space with more character, unique interiors with exposed brick, operable windows, and open floor plans. Tech tenants have preferred these buildings over the past 18 months making Class B rents rise quicker than Class A rents over the same time. As a result, developers are now looking to implement these features into new projects to capture the increased demand.
CBD concession packages continue to be higher than leases signed in non CBD buildings, however, both submarkets have seen more generous concessions over the past year. CBD concessions are up 190bp since this time last year to 7.6%. Non CBD concessions are up slightly less at 130bp to 5.6% due to higher demand in the Mission, Lower SOMA, and Rincon–South Beach.
Landlords who also own property in markets outside San Francisco know how favorable market conditions really are. Concessions given in San Francisco are far below comparable markets like Los Angeles, Manhattan, and Washington, DC. For example, tenants in Washington DC and Los Angeles County receive, on average, twice as much in free rent and TI dollars. The strength of the San Francisco leasing market is evident when viewed in this light.
Central Business District – CBD
Average asking rents are quickly approaching $70 PSF, forcing expiring tenants to make difficult decisions: pony up or move out. Tenants that signed 5 year leases back in 2010 can expect to pay almost double their current rent to stay in a comparable CBD space. This significant price hike is likely a large contributor to North Financial District having the most availabilities in San Francisco. Regardless, competitive demand has pushed effective rents higher by more than 10% to $64.44 since the end of 2014. Availabilities are unlikely to stay on the market for long as there are reportedly many tenants in the market with large space requirements. Concession packages have also been creeping up over the past few quarters and are currently at 7.5% of the value of the lease.
Non Central Business District – Non CBD
Since starting the year with a slight pullback, rents have recovered to end the first half of 2015 in positive territory. Non CBD overall effective rents increased $2.14 to $58.22 PSF since the end of last year. With rents forecasted to rise in the foreseeable future, tenants are leasing more space than they currently need in anticipation of future growth to lock in current rates and secure ideal spaces. This, along with a growing workforce, provides a frothy leasing market for landlords. While concessions have increased over the past few quarters, they still remain below 6% signaling landlords still hold considerable control during negotiations. Rents in non CBD submarkets should increase through the end of the year as Class B space remains in high demand and as CBD tenants are priced out of their ivory towers.
The Market Rent Report is produced by CompStak, Inc. For comments or questions, please contact Blake Toline: Blake@CompStak.com or Noam Shahar: Noam@CompStak.com.
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*Effective Rent takes into consideration the rent paid for every year of the lease, as well as landlord concessions such as free months and tenant improvement allowance.