Major office deliveries bring significant positive absorption
The first half of 2018 saw significant positive absorption due in large part to deliveries of Salesforce Tower, 181 Fremont Street, and 350 Bush Street, all of which were pre-leased prior to the end of construction. Absorption is expected to remain positive in the second half of 2018 as several large lease transactions from 2017 will become effective, as well as additional construction deliveries, all of which are pre-leased. San Francisco job growth has significantly slowed, and it remains unclear how major occupiers will attract talent either from the existing Bay Area pool or outside of the area. Significant housing developments across the region will help to ease the housing crisis, but it is unlikely to give relief in the near term.
Facebook signs largest lease in San Francisco history
San Francisco’s combined office vacancy rate in the first half of 2018 was 5.5%. Notable lease transactions include Facebook (750,000 SF) at Park Tower (under construction), Cruise Automation (380,000 SF) 301, 333 & 345 Bannan Street, WeWork (251,000 SF) at 430 California Street, and Twitter's renewal at 1355 Market Street (221,000 SF). Average asking rates continue their upward climb in the first half of 2018 to $74.40 PSF, up 3.49% year-over-year. For Class A office space in the CBD, expect an average of $78.43 PSF in the Financial District, and $78.19 PSF in the South Financial District.
Investment activity is heating up
Investments sales in the first half of 2018 were off to a slow start down 32% over the same period in 2017. However, activity in the second quarter has picked up with notable transactions including 123 Mission Street ($854 PSF) purchased by Northwood Investors, 101 Mission Street ($773 PSF) by Vanbarton Group, and 1390 Market Street ($473 PSF) a value-add acquisition by Swift Realty Partners. Several trophy buildings are on the market, including a 49% share of the Transamerica Pyramid, and it should be expected there will be additional activity in the second half of 2018 as the market reaches the top of the cycle.