CORFAC International Mid-Year 2012 Office Market Update


San Francisco’s technology-dominated real estate recovery continued to gain traction during the first half of the year as tenants grabbed nearly 1 million square feet more than they let go.

According to real estate research firm Reis Inc., San Francisco prices grew faster than any other U.S. markets during the quarter. Average asking rents have now jumped 55 % since the fourth quarter of 2009, rising from $31.37 per square foot to $48.71 per square foot, according to local real estate data. In the second quarter rents increased 4.6 %, while top creative buildings saw an increase of 6.4 %.

Barry Bram, a principal of TRI Commercial/CORFAC International in San Francisco, CA, reports on the local market.

With the staggering level of technology companies moving into mostly creative Class B buildings in the South of Market Area (SoMa – the preferred submarket for tech companies), financial district building owners believe that their conventional Class A space should command even higher rents, and they have responded accordingly by raising rents in San Francisco’s CBD. What is happening now is reminiscent of the bubble. For example, rents in SoMa jumped $14 a foot in one quarter – the current direct Class A space in Rincon/South Beach is averaging $57 per square foot, compared with $43 per square foot in the first quarter of 2012. In the financial district, comparable space that we leased less than 9 months ago in the mid-$30s is now commanding $45 per square foot.

Rent increases have caused the sale price per foot to spike dramatically. Hines recently brought 101 California Street to market at $900 per square foot and there are multiple offers as high as $1100 per square foot for the property. In contrast, 250 Montgomery sold at the bottom of the market a few years ago for $250 per square foot. In fairness, 101 Cal is a trophy asset while 250 Montgomery is a Class A-minus building.

Other tech-oriented office markets also improved, including San Jose, Denver, Austin and Seattle. Reis Inc. reports that these markets have seen rents increase 2 – 4% in the past year.  J.R. Bitzer, a principal with Bitzer Real Estate/CORFAC International in Denver, CO., describes the office market.

The Metro Denver office market continues to outperform much of the nation, as the overall vacancy rate has steadily declined since the beginning of 2010. Energy, healthcare and education continue to lead the sustained recovery. Metro Denver’s CBD, and particularly Lower Downtown (LoDo), has seen the majority of leasing activity as tenants are attracted to LoDo’s numerous amenities and close proximity to the metro hub of public transportation, Denver’s Union Station. Quality blocks of Class A space in all submarkets are at a premium and larger blocks of space over 100,000 square feet are few and far between. Boulder continues to be a major center of start-up technology companies and larger, more established companies are looking to the Denver/ Boulder corridor as they get priced out of Boulder and need larger blocks of space.

The picture is less rosy for the overall U.S. office market.

The pace of growth slowed in the three-month period ending June 30, according to Reis. Employers occupied an additional 4.1 million square feet in the period, just a 0.12% rise compared with the first quarter this year. That is a slowdown from January through the end of March, when the amount of occupied space grew by 6 million square feet, or 0.18%, from the fourth quarter of 2011.

The overall U.S. office vacancy finished the second quarter at 17.2%–unchanged from the first quarter, yet slightly lower than the post-financial crisis peak of 17.6% at the close of the third quarter of 2010.

Sluggish employment is not helping. The U.S. job market improved nominally in June, adding 80,000 jobs, which followed relatively flat employment growth in April and May, when the economy added an average of just 73,000 jobs per month. By comparison, the economy gained an average of 226,000 jobs per month during the first quarter of 2012.

According to Howard Greenberg, SIOR and principal of Howard Properties/CORFAC International in White Plains, NY, most U.S. markets still suffer from higher-than-average vacancy rates.

The trends have been consistent since the beginning of the economic downturn.  Large companies continue to shrink their office space, leaving vacant medium-to-large size blocks that take significant time to re-tenant. While there can be some growth in the small-to-medium size companies and law firms, most tenants tend to renew in place, and some of these also downsize. Almost everyone is loath to make long-term commitments, so lease terms tend to be shorter than usual. It is clear that demand for office space continues to slow, and the best chance to create healthier real estate markets is to re-purpose functionally obsolete office buildings to other uses, such as residential or medical, in order to reduce the available inventory and vacancy rates.


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