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July 07, 2017

Demand booms for San Francisco office space

San Francisco Business Times

Blanca Torres

Demand for San Francisco office space ballooned by 33 percent during the past year.

Even as vacancy and asking rates remain virtually unchanged for almost two years, tenants are lining up to lease up large spaces.

Prospective tenants seeking office space rose to 5.7 million square feet during the second quarter up from 4.3 million square feet at this time last year, according to brokerage firm CBRE. Meanwhile, vacancy crept up slightly to 6.7 percent during the second quarter from 5.7 percent two years ago.

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"Leading market indicators are suggesting more active market conditions ahead," said Colin Yasukochi, research director for CBRE.

Those indicators include the strong interest in tenants seeking spaces larger than 100,000 square feet, a decrease in sublease space available, and a continued positive outlook on the economy.

"There's a much higher volume of not only tenants in the market, but also leases that are in process," Yasukochi said. "The third and fourth quarters of this year will have much higher leasing than first half of the year."

Already, 2017 is on track to match or surpass the record for the highest number of deals over 100,000 square feet.

Software behemoth Salesforce closed on another lease in Salesforce Tower at 415 Mission St. with a 150,000 square-foot deal signed in the second quarter.

An estimated 18 tenants are in the market seeking space larger than 100,000 square feet, said Robert Sammons, research director for Cushman & Wakefield.

Prospective tenants in that size range include the University of California, San Francisco, self-driving company Cruise Automation and co-working space operator WeWork, which has already done several deals in San Francisco this year including taking 52,000 square feet in 655 Montgomery St. during the second quarter.

Cruise, owned by General Motors, already signed a huge deal in 2017 by taking 140,000 square feet in 1201 Bryant St.

WeWork is becoming a major player in San Francisco with 582,000 square feet in multiple locations and appetite for more, including a space in Salesforce Tower.

Technology companies continue driving the city's leasing activity with several deals reportedly in the works such as Inc. eyeing 200,000 square feet in 525 Market St. and Facebook interested in occupying up to roughly 400,000 square feet in Jay Paul Co.'s 181 Fremont- the deal everyone is talking about, Sammons said.

Many of the deals going on involve tenants expanding such as Glu Mobile, a gaming company, that doubled its space to 57,000 square feet in 875 Howard St. Another tenant, DoorDash, grabbed 51,000 square feet in 901 Market St.

"In general, things feel good," said Chris Roeder, a broker with JLL. Touring activity is strong and tenants are signing letters of intent despite the typical summer slowdown, he said. Like other sources, Roeder expects more lease agreements to become final by the end of the year.

Tenants are still flocking to creative space, offices with the most desirable locations or both, said James Bennett, managing partner with brokerage firm Kidder Mathews.

Many of the high profile deals, such as Facebook going to 181 Fremont, have yet to be signed, but if they happen, it will be a remarkable year, Bennett said.

"A lot of people felt the market was flattening out," Sammons said. "Now it seems the market is having a second wind if you will. This is new for San Francisco. There is not this boom and bust, just steady growth."

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