Negative absorption continues into first half of 2021
Employers in San Francisco are adding thousands of jobs to their payrolls every month as California’s economy reopens. The unemployment rate has dropped from 13.7% at the start of the pandemic to 5.5% with a growing shortage of workers in the area. Improving economic conditions will eventually trickle into the office market but downward pressure remains on asking rents.
While vacancy continues to rise and asking rents continue to fall, the pace of this change has moderated considerably over the quarter with conditions no longer deteriorating for both Class B and also sublease space. Draw-downs in sublease availability are necessary for rental rate and vacancy rate stability and future quarters will see sublease availability rates start to decrease.
Class A rents decline
Rents have continued to decline as landlords compete with sublessors to attract the next deal in the market. For tenants looking for short term move-in ready space, subleasing is an attractive option.
Average asking rents are down 7.6% from the 2019 peak with more expensive Class A product down 8.8%.
Activity has rebounded in the second quarter with increases in both direct and sublease deals taking place.
Increased activity and growing tenant demand is necessary for rents to rise in future quarters.
Sales price PSF hits record levels
The long-term future of office demand remains in question as employees continue to work from home. This has put a damper on office investment sales in 2021 as overall sales volume remains well below pre-pandemic levels.
Life science investment, however, is reaching an all-time high and investors are looking to reposition traditional office space to life science users.
In the first half of 2021, Kilroy Realty has sold The Exchange on 16th (1800 Owens) to KKR. This 750,000 SF asset finished construction in 2018 and was fully leased to Dropbox, Inc by the time of completion. This was the largest Class A office lease in the history of San Francisco. The sales price for this project totals $1.08 billion or $1,440 PSF, the highest per-square-foot sales price for a major property in the city’s commercial real estate market.