Significant expansion leads to improved job growth
The San Francisco office market saw 5.1 million SF of expan-sion in 2018, one of the most significant expansions in the City’s history. High demand from technology companies such as Google, Facebook, Dropbox and GM owned Cruise Automa-tion drove much of the expansion in 2018 as most of the large blocks of space have leased throughtout the city, including the pre-leasing of 2018 and 2019 deliveries.
San Francisco job growth picked back up at the end of 2018 to 2.5%, well above the national average of 1.7%, adding 14,100 jobs year-over-year. As technology companies continue to hire throughout San Francisco, expect job growth to remain steady well into 2019 and 2020.
Lack of supply and large blocks drive asking rates up
San Francisco’s office vacancy rate at the end of 2018 was 4.7%, as the market tightened while demand remained high. Notable 2018 lease transactions included Facebook (750,000 SF) at Park Tower, Cruise Automation (380,000 SF) 301, 333 & 345 Bannan Street, Google (309,000 SF) at One Market Street, and Salesforce (325,000 SF) pre-leasing all of the avail-able office space in the yet to be approved 550 Howard Street.
Increases in average asking rates, $78.61 PSF at the end of 2018, are primarily driven by the lack in supply of large blocks of office throughout downtown (6.9% YoY increase). In addi-tion, landlords are shifting to building more suites on spec in order to decrease the lead time for growing technology firms that need space rapidly, and are not willing to go through a TI process.
Investment slows in 2018
Sales activity picked up in the fourth quarter of 2018 with $1.1 million in volume, bringing the total for 2018 to $4.4 million, a 17.2% decrease from 2017. The Ferry Building ($1,089 PSF) was the most notable transaction of the period, purchased by a joint venture (Allianz Real Estate and Hudson Pacific Proper-ties), for a reported 3.8% cap rate. The building has 49 years remaining on a ground lease with the Port of San Francisco.
Other notable transactions included the three buildings at Em-barcadero Square ($835 PSF), 500 Pine Street ($1,299 PSF) and 55 New Montgomery Street ($695 PSF). Swift Realty Part-ners purchased 55 New Montgomery with plans to recapture smaller spaces to provide full floor plates, and renovate com-mon areas of the building.