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4/23/08
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Here’s a brief 1st Quarter 2008 report on the San Francisco office market, provided by Michael Tobin, a Director at Pacific Union Commercial Brokerage.
Absorption: Citywide absorption was positive for the 19th consecutive quarter, but that trend may well come to an end in the 2nd quarter. CBD Class A sublease space increased 50% 1st quarter and will continue to increase in 2008. This will negatively impact absorption rates.
Vacancy: Direct CBD and Class A CBD vacancies continued to decline to 6.9% and 6.5% respectively, while Overall Vacancy (both direct & sublease space) remained constant at 8%. Weakness in the banking and financial institutions affected the absorption rate and tempered the decline in Vacancy.
Rent: CBD Direct asking rents for all buildings increased to $47.22 psf or almost 3% in the 1st quarter. CBD Class A rents increased to $50.34 psf or 4.3%; SOMA Class A rents increased to $39.80 psf or 4.7%. The biggest rent increases in the 1st quarter were in SOMA where rents rose 5% to 8%, depending on office Class.
Activity: Office leasing and sale activity slowed as market fundamentals weakened, as evidenced by the unemployment rate nudging up to 4.4% and the shrinking of investment capital. However, the energy, healthcare, life science and technology sectors remained robust and continued to generate demand for new space. Conversely, financial and banking institutions were cutting back or freezing their demand. There was more uncertainty and concern regarding the economy, leading to caution and a reticence to make long-term commitments, thus, further dampening activity.
Forecast: The office market is experiencing a slowdown, as the economic pendulum swings toward slow or no-growth. This swing will bring with it a softening of rents, and other economic terms, in the next couple of quarters. Lack of available credit, the shrinking of investment capital and more cautious/conservative buyers have combined to slowdown the office investment market and are expected to be factors for the balance of the year.
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