san francisco office market report - q2 2016

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$71.65 FSClass A

Average Asking Rate

$64.83 FSClass B

Average Asking Rate

After several years of tremendous growth, it seems the San Francisco market might finally be showing signs of slowing down. Minimal rent growth in certain submarkets (1.5% in North Financial, -0.2% in Union Square, and -1.5% in SoMa) coupled with CBD negative absorption indicates the red-hot office market may be beginning to cool. And while a major slowdown seems unlikely, these figures combined with a decrease in the number of Bay Area venture capital funding deals witnessed over the last three quarters suggests that we may have reached a plateau for this market cycle.

With 463,000 SF of net negative absorption during Q2 2016, this marks the first time San Francisco has experienced negative absorption in the past 24 quarters (Q1 2010). The submarkets largely responsible for this negative absorption were the North Financial District and SoMa, which experienced 327,500 SF and 207,800 SF of occupancy losses, respectively. For the most part, this can be attributed to several

large block spaces “officially” becoming vacant during the quarter. Furthermore, as market uncertainty continues, tenants are increasingly growing more conservative with their decision making and expansion plans. This trend coupled with an estimated 4.7 million square feet of new office inventory set to come online by the end of 2017, will most likely lead to additional quarters with negative absorption in the coming years.

With rents well above historical averages, subleasing continued to be a popular move by tenants this quarter, accounting for three of the top five leases since April. Attractive because of their discounted rates, low build-out cost, and shorter lease durations on average, subleases continue to be desirable option for many tenants in this market. In the coming quarters expect to see a continued demand for premium sublease space as long as Direct Class A average rents remain in the high $70s and landlords demand long-term leases with large capital requirements.

Market Overview

Q2 2016 / Quarterly Office Market Report

San Francisco

Market Facts

5.6%Class A Vacancy

5.5%Class B Vacancy


San Francisco Q2 2016 / Quarterly Office Market Report

Market Snapshot

While rents remained fairly strong, negative absorption for the first time in 24 quarters may be an early sign that the market is beginning to slow. In the coming quarter, expect to see more tenant demand for discounted sublease space and possibly continued negative absorption as large amounts of new inventory come online.

Historical Asking Rental Rate (FSG) Historical Vacancy

By Sector (Deals over 25K)

Market Inventory

82,637,205 SF

VacancyRate

5.6%

Net Absorption

-463,168 SF

Average Asking Rate

$69.46 PSF

Under Construction

4,692,500 SF

Salesforce Tower will have an estimated 1.4 million SF of space coming online in 2017.

Technology

Financial/Banking Legal Other

Business Services

68%11%

8%

8%5%

Technology

Financial/Banking Legal Other

Business Services

68%11%

8%

8%5%

$0.00

$20.00

$40.00

$60.00

$80.00

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 20160.0%

2.0%

4.0%

6.0%

8.0%

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Class A Class B Class A Class B

$64.83

$71.65

5.6%

5.5%

$0.00

$20.00

$40.00

$60.00

$80.00

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 20160.0%

2.0%

4.0%

6.0%

8.0%

Q1 2014 Q2 2014 Q3 2014 Q4 2014 Q1 2015 Q2 2015 Q3 2015 Q4 2015 Q1 2016 Q2 2016

Class A Class B Class A Class B

$64.83

$71.65

5.6%

5.5%


Market By The Numbers

Historical Net Absorption & Leasing Activity


SUBMARKET Total RBA (SF)

Vacancy Rate A

Vacancy Rate B

Avail Rate A

Avail Rate B

Net Absorp

(SF)

Under Construction

(SF)

Avg Ask Total

Avg Ask A

Avg Ask B

Direct Avg Ask

Total

Direct Avg

Ask A

Direct Avg

Ask B

North Financial 28,098,999 7.3% 7.5% 13.4% 12.6% -327,459 504,978 $68.96 $70.31 $64.15 $71.87 $73.75 $65.73

South Financial 24,835,645 3.8% 3.0% 14.6% 7.4% 9,136 3,057,522 $68.35 $68.57 $66.95 $74.78 $74.94 $68.33

CBD Average 52,934,644 5.7% 5.6% 11.2% 9.7% -318,323 3,562,500 $68.69 $69.50 $65.18 $73.18 $74.32 $66.49

SOMA* 12,867,460 8.5% 6.0% 15.4% 9.9% -207,820 450,000 $70.16 $76.69 $67.08 $72.41 $82.26 $67.15

Union Square 4,024,460 0.0% 4.5% 4.5% 9.9% 51,561 0 $62.57 $70.00 $62.05 $62.73 $70.00 $62.06

Mid-Market 3,957,378 5.0% 1.0% 10.2% 2.3% 2,448 0 $68.28 $70.92 $55.88 $64.24 $70.69 $52.43

Jackson Square/North Waterfront

5,158,051 3.7% 6.4% 5.3% 10.9% 11,398 0 $58.46 $59.19 $58.53 $60.74 $60.57 $61.07

Civic Center/Van Ness Corridor

1,951,424 4.9% 4.9% 8.3% 7.1% -2,432 0 $52.72 $57.00 $49.32 $53.66 $57.00 $50.38

Mission Bay 1,743,788 0.0% - 0.0% - 0 680,000 - - - - - -

San Francisco Total 82,637,205 5.6% 5.5% 10.8% 9.4% -463,168 4,692,500 $69.46 $71.65 $64.83 $71.63 $77.99 $65.73

*Includes China Basin, South of Market, Rincon/South Beach, Yerba Buena, Showplace Square, and Potrero Neighborhoods

Net

Abs

orpt

ion

Squa

re F

eet L

ease

dNet Absorption Leasing Activity

Q12012

Q22012

Q32012

Q42012

Q12013

Q22013

Q32013

Q42013

Q12014

Q22014

Q32014

Q42014

Q12015

Q22015

Q32015

Q42015

Q12016

Q22016

0

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

(500,000)

(250,000)

0

250,000

500,000

750,000

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© 2016 Avison Young [Avison Young - Northern California, Ltd.]. All rights reserved. E. & O.E.: The information contained herein was obtained from sources which we deem reliable and, while thought to be correct, is not guaranteed by Avison Young.

AY San Francisco Team

Tenant Building Submarket Square Feet Type

Fitbit* 215 Fremont Street South Financial 311,166 Sublease

Lyft 185 Berry Street SOMA 110,654 Sublease

Stripe 185 Berry Street SOMA 102,392 Sublease

UCSF 499 Illinois Street Mission Bay 97,702 Sublease

Lyft 185 Berry Street SOMA 91,000 Direct

Top Leases

Building Buyer Submarket Square Feet Sale Price PSF

Market Center The Blackstone Group South Financial 752,738 ±$510,000,000 ±$678

140 New Montgomery Street Pembroke Real Estate South Financial 295,177 ±$284,000,000 ±$962

180 Montgomery Street Sidra Capital North Financial 304,162 ±$185,000,000 ±$608

799 Market Street ASB Real Estate Investments SOMA 142,902 ±$141,500,000 ±$990

274 Brannan Street CIM Group SOMA 105,225 ±$71,000,000 ±$675

Top Sales

Building Developer Submarket Square Feet % Leased Delivery

Salesforce Tower Boston Properties South Financial 1,420,081 58% Q2/17

Park Tower John Buck / Golub & Co. / Metlife South Financial 751,500 0% Q1/18

The Exchange Kilroy Realty Mission Bay 680,000 0% Q3/17

350 Bush Street / 500 Pine Street Lincoln Property / GEM North Financial 432,978 35% Q1/17

181 Fremont Street Jay Paul South Financial 410,313 0% Q2/17

Under Construction

Office Group

Nick Slonek, Managing Director / Principal 415.322.5051

Jonathan Allen, Principal 415.322.5053

John Cashin, Principal 415.322.5052

Riccardo Gale, Principal 415.322.5063

Raquel Ledesma, Graphics Designer 415.322.5057

David Linsmayer, Principal 415.322.5061

Jim Lucas, Vice President 415.322.5051

Melinda Miyagishima, Operations Manager 415.322.5058

John Norton, Principal 415.322.5054

Ana Potochniak, Administrative Coordinator 415.322.5060

Peter Setzer, Senior Vice President 415.349.3402

Ryan Smith, Marketing Coordinator 415.349.3400

Bethany Teodoro, Senior Vice President 415.322.5066

Robert Yeagle, Market Analyst 415.322.5056

Kathryn Zambetti, Vice President 415.322.5064

Griggs Ziesing, Vice President 415.322.5067

Property Management / Lease Administration

Roger Bilstad, CPM®, EVP, Management Services 916.426.3582

Tom Greenfield, CPM® LEED®, Property Manager 510.534.4700

Bryce McEfee, LEED® AP, Property Manager 916.426.3584

Tom McEfee, CPM®, SVP, Management Services 916.426.3570

Project / Construction Management

David Gonzales, Managing Director / Principal 415.322.5065

Shannon Dupler, Manager, Financial Reporting 415.349.3399

Clare Friel, Project Manager 415.349.3406

Nicole de la Rosa, Assistant Project Manager 510.254.4268


Avison Young - Northern California, Ltd.601 California Street, 5th FloorSan Francisco, CA 94108T 415.322.5050 F 415.322.5055

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san francisco office market report - q2 2016

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