By Robert Sammons
Private sector jobs for San Francisco have climbed to a record high of 922,500 as of May 2015, an increase of 39,400 (4.5%) year-over-year. The traditional office divisions recorded an increase of 25,200 positions or 6.9% over that same time period.
Not surprisingly, the strongest subsector in office employment has been computer systems design & related services, which climbed by 10,000 positions or 18.2% to 64,800 year-over-year. The unemployment rate tumbled to 3.4% from 4.1% one year ago.
Sublease Vacancy Up/ Leasing Activity Down
The overall vacancy rate Citywide held steady at 6.4% in the second quarter. Year-over-year, vacancy has dropped 250 basis points (bps) from 8.9%. We feel the disparity between strong job growth and recent flat vacancy is due to two reasons – tenants that signed leases ahead of hiring and are now in the process of absorbing that space in addition to tenants that continue to reduce the square footage per employee.
Citywide overall net absorption was 34,409 square feet (sf) compared to 640,304 sf in the first quarter. An increase in sublease vacancy was primarily to blame for the latest less than stellar figure. Direct absorption was healthier at 254,742 sf.
The Citywide overall average asking rent continued to climb in the second quarter, closing at $63.39 per square foot (psf), up 1.8% from $62.29 psf in the first quarter and 14.2% higher than the $55.52 psf one year ago. It is rapidly approaching its record high of $66.00 psf recorded in the fourth quarter of 2000.
Leasing activity for the second quarter was 1.3 million square feet (msf) down from 2.1 msf in the first quarter. The average quarterly (new) leasing average going back to the first quarter of 2000 is just over 1.6 msf. Foreign and domestic investors remain eager to purchase properties in San Francisco, but the biggest challenge affecting these investors today is the lack of product on the market.
Top trends that will be monitored closely in the near term include:
– Tenants are in the market for 6.7 msf of office space – requirements from tech tenants alone equals 3.9 msf or 58% of that figure. There will be “spreading of the wealth” with some looking to the CBD for their space needs while others venture further afield to Mission Bay, Pier 70, the Shipyard and outside of San Francisco to the East Bay.
– Sublease vacancy – the current figure of 841,384 sf remains less than half the quarterly average since 2000 (1,940,447 sf). There will be tenants in the market jumping on what is generally less expensive space that is, in many cases, already built out. However, there will be some additional sublease vacancy hitting the market at the same time.
– Prop M – There is only 3.5 msf of availability in the allocation pool (that includes the 875,000 sf that will be added in October of this year). Meanwhile, there are 4.2 msf in pending projects and another 7.3 msf in pre-application projects.
After a likely flurry of approvals within the next 12 months, the development pipeline is going to be as dry as the Bay Area weather!
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