Bay area economy at near full employment
At the end of 2017, the San Francisco office market saw positive trends in net absorption across much of the downtown market, reversing major negative absorption seen in the first half of the year. Vacancy dipped as results of positive leasing activity from earlier in the year took affect. It is also worth mentioning completion of major office developments have been pushed out from Q4 2017 to Q1 2018. Much of the new product has been pre-leased prior to delivery with the most notable being Salesforce Tower, which was over 90% pre-leased. Employment growth has all but stalled in 2017 dropping to 1.7% year-over-year as the city nears full employment. Major tech firms rapidly growing their footprint in downtown will rely on employees commuting to the city from other markets such as East Bay and the Peninsula.
Pre-leasing strong in development projects
San Francisco’s combined office vacancy rate at the end of 2017 was 5.5%, an improvement over 2016. Notable lease transactions include Dropbox, Inc. (736,000 SF) and Atlassian (145,215 SF) deals, as well as Okta (207,066 SF) at 100 First Street, and Facebook (432,000 SF) leasing the entirety of 181 Fremont Tower, which is expected to deliver in early 2018. Average asking rates continue their upward climb, in the second half of 2017 to $73.57 PSF (up 8.35% year-over-year). For Class-A office space in the CBD, expect an average of $77.84 PSF in the Financial District, and $75.94 PSF in the South Financial District, both increasing more than 2% from third to fourth quarter.
222 second street sells for $542.9 million
Investment sales in 2017 were over $5.25 billion and one of the strongest markets in the U.S. Notable transactions in the second half of 2017 included 222 Second Street ($1,200 PSF) which Tishman Speyer bought out it's partnership with J.P. Morgan, 201 California Street ($739 PSF) purchased by Beacon Capital Partners and 22 4th Street ($1,038 PSF) purchased by Ponte Gadea. The fourth Quarter was notably slow for investment sales in San Francisco, which is a trend that has been seen in other major markets.