Savills Studley Report San Francisco office sector Q3 2014
Transcription
Savills Studley Report San Francisco office sector Q3 2014
Savills Studley Research San Francisco Savills Studley Report San Francisco office sector Q3 2014 SUMMARY Market Highlights AVAILABILITY AT MULTI-YEAR LOW San Francisco’s overall vacant availability rate fell for the sixth quarter in a row, decreasing by 0.3 pp to 8.1%. The Class A rate dipped by 0.6 pp to 8.2%, the lowest vacancy rate in the last ten years. The Class A rate in Financial District South has declined by 3.5 pp over the last four quarters from 10.5% to 7.0%. QUARTERLY LEASING SLOWS Deal volume barely reached 2.0 msf, falling by 30.6% from the 2.9 msf leased in the second quarter, but was still on par with the market’s five-year average. Trailing leasing (the sum of the four most recent quarters of leasing) totaled 9.2 msf, exceeding the annual average of 7.9 msf by 17.0%. RENTS PUSH HIGHER Asking rents continued their growth, rising by 0.6% to $51.90 during the third quarter. Overall asking rents have increased by 6.0% year-on-year, with a 6.6% annual increase in Class A buildings. Rents in the highestcaliber properties are currently running well above $60.00. “Leasing activity slowed and venture capital investors have recently drawn their horns in a bit. Nevertheless, space options remain limited and rents continue to rise, giving some tenants added cause to look more closely at East Bay and Oakland." Colin Scanlon, Savills Studley Research Savills Studley Report | San Francisco Round and Round It Goes Office-Using Employment Trends Millions 0.40 10.0% 0.35 8.0% 6.0% 4.0% 2009 0.30 0.25 2.0% 0.20 0.0% 0.15 -2.0% -4.0% 0.10 SFO. Office Emp. SFO. (% Annual Change) 2014 2013 2012 2011 2010 2008 2007 2006 0.00 -6.0% 2005 0.05 U.S. (% Annual Change) -8.0% -10.0% Source: Bureau of Labor Statistics Availability Rate Trends Availability Rate Trends (%) 15% 12.5% 10% 11.1% 8.2% 8.0% 5% Class A 0% 2013 3Q 2013 4Q Asking Rent Trends ($/sf) $60 $50 $40 2014 1Q 2014 2Q Class B 2014 3Q Rental Rate Trends $54.86 $51.47 $45.84 $44.32 $30 $20 $10 $0 02 2013 3Q 2013 4Q 2014 1Q Class A Class B 2014 2Q 2014 3Q Businesses continue to conclude – despite the rising costs of labor and real estate – that a location in San Francisco is indispensable if they want to capture talent and foster innovation. Heated competition for certain tech skills is fueling some of the strongest wage growth in the U.S. According to recent numbers from Robert Half, salaries for technical employees are expected to jump by approximately 7% to 10% and even as high as by 12% for some employees. Demand in San Francisco is strongest for software engineers, followed by network administrators, help-desk technicians, data scientists and database developers. Global giants such as Google and Microsoft, as well as a swarm of start-ups, continue to chase talent and space at a frenetic and dizzying pace. The faster the merry-goround goes, the more people on the ride ask how much faster it can go and when it will stop. While landlords are bullish, they are also mindful that the current rally cannot last indefinitely and are doing their best to safeguard investments via security deposits and other collateral. Most owners realize that they can’t simply roll the dice; they know they must be selective in their due diligence and hope they are picking companies that will last for the duration of the lease. Owners with creative-space lease rollovers in the next nine to twelve months are in an enviable position – assuming their tenants have longevity. Talent Race Continues For now, the rally shows little sign of cooling as more companies crave a bigger presence in San Francisco. Bloomberg announced that it would open an R&D office at 140 New Montgomery Street that will ultimately employ 100 software developers. Founder Michael Bloomberg said that “to remain on the cutting-edge, we need to be able to hire the most talented developers from Silicon Valley and its surroundings.” Google continued its San Francisco expansion, paying $65 million for 188 Embarcadero in July. The eight-story, 88,000-sf building is just two blocks from Google’s current location at Hills Plaza. Google also leased 242,640 sf at Spear Tower in One Market Plaza. These moves, combined with Google’s 386,000-sf expansion late last year, push the company’s footprint in San Francisco to more than 725,000 sf. Bargains Limited to Periphery Current market conditions require tenants to either be prepared to pay top dollar or take space in perimeter locations such as Q3 2014 the North Waterfront, Van Ness Corridor or Bayview. Smaller companies in the 10,000sf to 20,000-sf range, not concentrated on core tech markets such as SOMA, can find more traditional office space in Financial District North, but even there concessions have dried up and rents are rising. Tenants with the flexibility to base all or some of their operations in the East Bay or Peninsula stand to capture significant savings. Some companies are already being pushed out of San Francisco due to spiking rental rates. East Bay and Oakland have not attracted the likes of Google or Bloomberg, but deal volume has increased as a number of smaller and mid-sized companies have made the move across the bay. Anecdotally, brokers have noted increased interest from larger tenants, and a couple of developers about to start construction on spec properties are counting on some of these prospective deals coming to fruition. Mission Bay 2.0 The tech rally has already transformed SOMA and MidMarket, the latter of which was not even an office submarket until recently. Mission Bay appears to be next. The selloff of Salesforce’s land parcel is setting the stage for a shift from a district composed primarily of biotech and medical users to one that is home to a greater number of tech and creative-sector firms. Earlier this year, the Golden State Warriors bought a big piece for their new arena. In the third quarter, Uber Technologies and Alexandria Real Estate Equities teamed up to buy one of the last pieces of the parcel, paying $125 million for 1415 and 1515 Third Street. The site will house a 422,000sf headquarters for the rapidly expanding car hailing app. Finally, the University of California acquired a 3.8-acre piece, and may build up to 500,000 sf of office or biotech space. Multiple Space Shortfalls In contrast to most U.S. markets, San Francisco does not have a demand problem – it has a supply problem. There is never enough skilled talent and not enough space to house it. There are currently at least 15 tenants with space requirements of 100,000 sf or more (including JPMorgan, First Republic and Cooley) and only six existing buildings with a block of that size. Space shortfalls will likely force many tenants to renew their existing lease. If San Francisco does not resolve its development obstacles, a shift to the East Bay and the Central Valley may become inevitable. As developers buy sites and seek approval for projects, they are concerned about Availability Rate Comparison Rental Rate Comparison Overall Rental Rate Comparison Availability Rate Comparison SOMA 3.4% Union Square/Civic Center Mission Bay/Showplace Square Yerba Buena Jackson Square Financial District South San Francisco Rincon/South Beach 3.9% Financial District South 4.4% 5.0% 5.9% 7.5% 8.1% Waterfront/North Beach 9.0% Financial District North Financial District North $52.01 San Francisco $51.90 Union Square/Civic Center $51.71 SOMA $51.47 Jackson Square $50.51 $39.86 Yerba Buena 14.1% US Index 10% $36.76 US Index 16.9% 5% $53.74 Waterfront/North Beach 10.2% Rincon/South Beach (%) 0% $57.12 15% $32.81 Mission Bay/Showplace Square 20% ($/sf) $29.32 $0 $10 $20 $30 $40 $50 $60 Major Transactions Tenant Sq Feet Address Market Area Google 242,640 1 Market St Financial District South Citrix Systems 83,541 505 Howard St Financial District South Moody's KMV 69,242 405 Howard St Financial District South Perkins Coie 55,695 505 Howard St Financial District South Prosper Marketplace 47,905 221 Main St Financial District South Next15 46,791 100 Montgomery St Financial District North NerdWallet 45,739 901 Market St Yerba Buena Lighthouse for the Blind 39,332 1155 Market St SOMA Google 36,851 188 Embarcadero Financial District South TY Lin 30,159 345 California St Financial District North a potential major stumbling block – Proposition M. This proposition, voted in during 1986, caps the amount of office development that can be approved in San Francisco at 950,000 sf per year – unused rights roll over to the next year. The Uber/Alexandria parcel was one of the last sites with automatic Proposition M approvals. Currently, about 2.0 msf of office development capacity is under the cap, well short of the 11.0 msf of office space in pre-approval stages. Developers have been scrambling to submit proposals before the gates go up but the issue may be coming to a head. News that a key deal on property taxes and special assessments at Transbay Terminal fell apart as the quarter was ending has caused developers to threaten to halt construction. Just as tech and creative-sector tenants are willing to bear the costs of staffing and leasing in San Francisco, many institutional and foreign investors are still willing to pay the price for assets. Buildings continue to sell for more than $600 psf. Paramount further expanded its portfolio in the third quarter, adding 50 Beale Street for $395 million ($596 psf). Columbia Property Trust, which already owns 221 Main Street and 333 Market Street, paid $309 million ($646 psf) for 650 California Street. The 33-story, 178,000-sf property was 88% occupied at time of sale. Looking Forward Deal volume is likely to taper off for the balance of 2014. A handful of tenants are in the market for larger blocks, but the frenzied search for big blocks is stymied by the lack of options. New construction could generate some additional momentum, but the standoff between developers and the city regarding zoning and taxes, particularly in the Transbay district, may bear more watching than the leasing market. If this standoff is not resolved, the merry-go-round could experience a sharp, abrupt stop. savills-studley.com/research 03 Savills Studley Report | San Francisco Map Submarket Total Leasing Activity Available SF Availability Rate Asking Rents Per SF SF (1000's) Last 12 Months This Quarter % Change from Last Qtr. Year Ago This Quarter pp Change from Last Qtr. (1) Year Ago This Quarter % Change from Last Qtr. Year Ago 1 Financial District North Financial District North - Class A 30,155 21,343 2,296 1,712 3,072 2,106 -3.9% -13.6% 2,988 2,185 10.2% 9.9% -0.4% -1.6% 10.2% 10.7% $52.01 $53.56 -2.0% -1.5% $50.15 $51.04 2 Financial District South Financial District South - Class A 23,700 19,252 3,336 2,957 1,786 1,339 -12.7% -11.7% 2,712 2,015 7.5% 7.0% -1.1% -0.9% 11.5% 10.5% $53.74 $54.98 0.9% 1.3% $51.66 $53.21 3 Rincon/South Beach Rincon/South Beach - Class A 4,266 1,544 719 460 603 347 43.2% 24.7% 292 109 14.1% 22.4% 4.3% 4.5% 7.0% 7.1% $57.12 $64.24 0.3% 3.2% $46.09 $46.41 4 Yerba Buena Yerba Buena - Class A 3,320 730 660 249 164 3 -37.6% 0.0% 598 255 5.0% 0.5% -3.0% 0.0% 17.9% 36.9% $36.76 $50.00 -1.0% 0.0% $39.61 $42.06 5 SOMA SOMA - Class A 4,475 1,845 795 N/A 154 26 -14.1% 18.6% 848 226 3.4% 1.4% -0.6% 0.2% 18.2% 12.2% $51.47 N/A 13.4% N/A $43.81 N/A 6 Union Square/Civic Center Union Square/Civic Center - Class A 4,999 503 303 30 197 12 14.2% -13.3% 781 10 3.9% 2.3% 0.5% -0.4% 15.9% 2.0% $51.71 N/A 1.3% N/A $41.03 $46.05 7 Jackson Square Jackson Square - Class A 2,085 414 319 46 122 N/A -34.0% N/A 237 N/A 5.9% N/A -3.0% N/A 12.1% N/A $50.51 N/A 7.4% N/A $51.11 N/A Waterfront/North Beach Waterfront/North Beach - Class A Mission Bay/Showplace Square Mission Bay/Showplace Square - Class A 3,455 859 4,947 2,688 132 19 661 375 310 109 220 91 19.8% 113.0% 15.7% 243.8% 294 42 603 399 9.0% 12.7% 4.4% 3.4% 1.5% 6.7% 0.6% 2.4% 8.0% 4.6% 12.7% 18.6% $39.86 N/A $29.32 $55.00 0.5% N/A -6.7% 0.0% $38.21 $38.28 $51.56 $55.00 San Francisco Total San Francisco Total - Class A 81,401 49,179 9,223 6,027 6,628 4,036 -4.1% -7.3% 9,354 5,288 8.1% 8.2% -0.3% -0.6% 11.6% 11.1% $51.90 $54.86 0.6% 0.8% $48.95 $51.47 8 9 1-9 Please contact us for further information Savills Studley 150 California Street 14th Floor San Francisco, CA 94111 (415) 421-5900 Bay St Co lum Branch Manager Steve Barker - Executive Vice President [email protected] 8 sA ve 7 a St Californi Bush St 6 M (1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. bu a e rk tS t 1 4 7t h St 5 4t 2 h se wn To 16th St nd St 9 3rd St The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2014 Savills Studley 04 3 St www.savills-studley.com @SavillsStudley