Hans Hansson | February 24, 2014
How Do Current Office Rental Rates Compare to the Resurgence in Tech in our City by the Bay
I entered the commercial real estate business in 1984. My first deal was a $52.00 per square foot lease at 44 Montgomery Street. Two years later, I was doing A-Class leases at only $18.00 per square foot. San Francisco has been an up and down office market like no other city in the United States. It has cycles that include major increases in rental rates, followed by a major "bust" market which creates virtually no office market other than traders of office space that take advantage of empty A-Class space. Typically, these types of office space traders upgrade from their B and C marketplace spaces, leaving extremely high vacancy factors in smaller, older buildings.
In 1979, San Francisco had a vacancy rate of only three percent. This started a major construction boom to address our growing need for office spaces. In 1997, we experienced the start of the 'dot-com boom.' During this cycle very little A-Class development actually occurred. However, warehouses and smaller office buildings were converted into new industrial-like, "sexy-techâ€?" office spaces, which helped address the need for new space during this time of the market cycle.
Today, there are approximately 2 million square feet of new office space planned, but the ratio of new office space versus how much office space will actually be occupied is yet to be known. If there happens to be another "bust" after the boom, there could be a lot of wasted office space sitting on the market.
So, where are we now compared to the 'dot-com boom and the bust market?' Starting in 1997, the overall office vacancy in the city was 12 percent. This had slowly been reduced from a high of 22 percent, as a result of the "perfect storm" that hit our city starting in 1989, which included the earthquake, the lack of available credit and the major recession that hit the United States. Rental rates jumped over $90.00 on average for A-Class with an overall rental rate of over $70.00 per square foot for all sectors by the end of 2000. The overall vacancy rate crept under 2 percent.
One year later, the average rental rate dropped to $52.00 with a vacancy of 18 percent and by 2002 had hit an average rental rate of $23.00 with a vacancy rate of 24 percent. Then things started looking up. Once the U.S. economy began growing again between 2010 and 2012, San Francisco added another 20,000 residents and is now home to 825,000 people.
Today, our city is now the third-fastest growing county in California, and the only two counties growing faster lay to its immediate south, a.k.a -Â Silicon Valley. The average A-Class space averages $57.00 per square foot with overall rental rate average of $42.00. Our current vacancy rate is at 6.7 percent. Based on past markets, this would suggest that we still have growth in terms of rental rate gain if we see a larger drop in overall vacancy rates.
There's no question the city is booming. San Francisco has added 26,700 jobs just last year, according to the San Francisco's economic statistics. About 8,000 have been jobs in the technology field. Since the Payroll Tax Exclusion zone was created in 2011, seventeen businesses have moved into the Central Market and Tenderloin Tax Excluded areas.
This week, we learned that Charles Swab, American brokerage and banking company, has decided to move over one thousand of their employees out of San Francisco due to the overall cost to work here. With rental rates over 40 percent higher than one year ago, we may be able to clamp down rates if we start seeing our traditional base businesses leaving the city.
Already we are seeing apartment rental rates starting to settle. With numerous new units in the construction pipeline this year, potential rental rates falling could be a sign of either overbuilding, or that the overall market has finally reached stabilization.
All of this growth is of course attributed to the growth in technology. San Francisco workers in tech occupations have seen their salary average rise to $100,000 as of May last year. More and more affluent workers are able to afford the new rents that many existing residents and business owners cannot.
As long as new companies are coming into being and existing firms thrive, we will continue to see a strong office market in San Francisco. My guess is that we are in the sixth-inning of a nine-inning baseball game.
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