Office Rents in San Francisco Have Hit Record Highs

San Francisco is seeing record high office rents, surprisingly surpassing the rates of the dot com boom. Rents in the central business district (CBD) for the third quarter were an astounding $81.25 per square foot. The previous record for rents occurred nearly two decades ago when rents in the fourth quarter of 2000 were at $80.16 per square foot. So what is driving this hike? There are a few factors that are contributing to this. First, rents in various classes are being pushed up due to a lack of large block availability — and tenants are competing hard against each other for this in-demand space. Secondly, projects are being delivered pre-committed and pre-leased, because of the strong tech economy here, thus increasing the demand and therefore the asking rents. Where some surges in rent can be accounted for new product/construction entering the market, in San Francisco’s case, it truly is the execution of leases. And although there is 4.9 million square feet in development underway, most of this space is pre-committed, such as Facebook at Park Tower and Uber at 1455 3rd Street. This creates a recipe for rents that will continue to climb.

Capital Investment and Tenant Leasing Activity are Both Strong

The high watermark for recent investment sales has been $1,100 to $1,300 per square foot. Half of the buildings sold during the third quarter are in the Financial District, achieving an average price of $932 per square foot, with cap rates at 5%. As for leasing activity, technology represents 50% of all tenants in the market in San Francisco looking for space. This sector continues to be the dominant force in the San Francisco Bay Area.

Coworking continues to be another impactful item in real estate. We’re seeing a lot of blocks of space being leased by coworking companies. WeWork, which just became the largest tenant in New York City, currently holds 65.6% market share in San Francisco of all coworking companies, but there are several other competitors at WeWork’s heels, such as Spaces, Knotel, Mindspace and Industrious.

Looking into the 4th Quarter 2018 & 2019

We are predicting a strong fourth quarter in San Francisco. Year to date, 13 lease deals over 100,000 square feet have closed. In the financial markets, we’re hearing of a national slowdown late into 2019 and into 2020. However, at the moment, San Francisco’s office market is at the top of its game. There are several tenants out in the market looking for 100,000+ square feet and, as mentioned, rents are stronger than even the peak of the dot com era. It has been said that we are in the middle of a new California Gold Rush — a truly historic time with incredible wealth, stemming from the formation of industry disruptors like Google, Airbnb, Uber, Salesforce and Twitter throwing down their home plate in the Bay Area. Take Mission Bay for example. Changes have popped up dramatically and quickly: Dropbox is moving into The Exchange, Uber’s soon-to-be new headquarters at 1455 3rd Street, the new future Warriors arena and brand new multifamily projects to house our ever-growing economy. The area is unrecognizable, and the city is continuing to change due to heavy absorption from more and more tenants, increased construction, and the rising demand in the area. This momentum is sure to continue to change the face of San Francisco’s commercial real estate market in the near future. 

Jamie Kendall is a Vice President of Office Leasing and Investment Sales. Based in San Francisco, she represents landlords and tenants on real estate transactions. She has done multiple record-breaking deals in her career and is dedicated to top client service. Connect with Jamie on Twitter, LinkedIn or through email at jamie.kendall@colliers.com