Continued expansion keeps job growth above national average
The office market continued a positive expansion into the first half of 2019 with 625,000 SF of positive net absorption. High demand from technology companies has created several unique lease deals including two leases for buildings which have yet to receive City approval. 88 Bluxome Street (Pinterest, 430,000 SF) and 550 Howard Street (Salesforce, 325,000 SF). The economic outlook in San Francisco and the greater Bay Area continues to improve, albeit slowing, with 2.1% year-over-year job growth in the period, 50 basis points higher than year-over-year national job growth (1.6%). Unemployment rates have reached a 40-year low in San Francisco (1.9%) and have hovered around 2.0% for the past 12 months.
Average asking rates drive up while supply of large blocks dries up
San Francisco’s direct office vacancy rate at mid-year 2019 was 4.5%, as the market tightens while demand remains high. Notable lease transactions included two leases at 50 Beale Street, Autodesk (118,000 SF) and Glassdoor (117,000 SF), while Samsara signed at 1 De Haro Street (116,000 SF). Increases in average asking rates, $80.93 PSF at the mid-year 2019, continue to be driven by the lack in supply of large blocks of office throughout downtown (8.8% YoY increase). As of the end of June there are no existing blocks of space over 100,000 SF remaining, a significant challenge for tenants that either have to break up their requirements or look to markets in Oakland or the South Bay.
Investment sales rebound in H1 2019
Sales activity is off to an impressive start in the first half of 2019 with $5.4 billion in office volume so far, already surpassing total sales volume for 2018 by 17.4% ($4.6 billion). Notable transactions in the first half of the year include two headquarters purchases and remaining minority stake at Salesforce Tower. The Gap, Inc. exercised their purchase option for 550 Terry Francois Boulevard ($1,211 PSF; 4.4% cap rate) while Juul purchased 123 Mission Street ($1,149 PSF) for a new headquarters location in the South Financial District. Boston Properties (BXP) purchased the remaining 5% minority ownership stake at Salesforce Tower for a reported $210.9 million, or roughly $2,969 PSF.