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June 22, 2024
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San Francisco Office Market Had a Strong Year in 2018


This report was provided by real estate services firm Kidder Mathews

San Francisco’s office market finished 2018 very strong, with tech giants leading the way once again, according to 2018 year-end research from real estate services firm Kidder Mathews. Google and Facebook signed on to leases that committed them to occupy over 1 msf combined. This year saw over 3.1 msf of construction deliveries for San Francisco, which is the largest amount of newly constructed space in over 20 years. Demand continues to keep pace with deliveries, as direct vacancy ended the year at 3.95%. 2018 was a particularly remarkable year in this current bull market, finishing with decade highs in occupancy, net absorption, new deliveries, and direct rental rates.

New Construction

The Exchange at 1800 Owens Street, which was fully pre-leased by Dropbox, did not deliver in the fourth quarter as expected, with delivery on the property delayed to April 2019. Despite no office property deliveries in the fourth quarter, 2018 saw more projects finish construction than any year in the last decade. In 2018, the South Financial District submarket saw the most deliveries, with 1.83 msf of office property constructed this year. The top delivery for the year was easily Salesforce Tower, which added 1.4 msf to the South Financial District’s office inventory. The South Financial District will continue to deliver the bulk of new space in the coming years as 42.8% of the development pipeline will be delivered in this vibrant submarket. Looking ahead to 2019, there is over 4.7 msf of office property in the construction pipeline with nearly half of the space expected to deliver sometime next year.

Asking Rental Rates

Overall direct asking rents closed 2018 at $63.26, which represents an 8.98% increase from the close of 2017. Class A direct asking rents increased 8.30% on a year-to-year basis, while Class B buildings experienced a year-over-year rise of 5.44% in direct asking rents. Most submarkets remained relatively stable with most increasing at or around 5% in rental rates year-over-year, while Jackson Square, Civic Center, and the Van Ness Corridor had year-over-year decreases of less than 5%. Two notable exceptions were Mission Bay/China Basin and Mid-Market. On one end, Mission Bay/China Basin saw an astronomical year-over-year increase of 119.4% in annual direct asking rental rates, jumping from $30.29 p.s.f. to $66.45 p.s.f. Yet, on the other hand, Mid-Market has apparently lost much of its appeal as this submarket saw a 10.51% year-over-year drop in annual direct asking rental rates. Looking ahead, rental rates will more than likely increase slightly or remain stable overall, as the current cycle starts to reach its peak.

Absorption & Vacancy

The office market experienced one of the most active years in recent memory with net absorption hitting 5.25 msf by year’s end, which is the highest San Francisco has seen in over two decades. Class A buildings led the way in net absorption with 3.8 msf of positive direct net absorption this year. The Financial and South Financial Districts led all other submarkets in leasing activity finishing 2018 with 3.68 msf and 3.85 msf respectively. This is no surprise as the three top leases of 2018 were in one of these two submarkets. Facebook leased over 700k sf in Park Tower at Transbay in May, which represented the largest lease transaction of 2018. Coming in second was another property in the South Financial District, The Landmark at One Market, which in November saw Google sign on to occupy over 300k sf. Rounding out the top three leases of the year was the lease of nearly 270k sf of space in the Financial District at One Embarcadero Center by global law firm Nixon Peabody LLP in July.

The total and direct vacancy rate for San Francisco ended 2018 at 3.95% and 4.90% respectively, which is the lowest end of year rate for both since before the “dot-com” crash in 2001. The total vacancy rate is 160 basis points lower year-over-year, while direct vacancy dropped 165 basis points year-over-year. Leasing should remain strong in 2019, but with occupancy and rental rates already very high, it is likely that net absorption, leasing activity, and vacancy rates finish 2019 relatively stable.


San Francisco office property sales ended 2018 with a 22.68% drop in sales volume to $2,362,943,200 which represented 4.8 msf. Furthermore, average price p.s.f. dropped 4.15% year-over-year to $622.63. These numbers represent a significant drop year-over-year, which in large part can be attributed to capital controls imposed by China. Chinese investors are a large part of the property investment market in San Francisco, and the crackdown on cross-border investments by the Chinese government most likely took a toll on the market. Despite the somewhat disappointing overall sales numbers, 2018 had many significant transactions that bode well for the future. CalSTRS and DivcoWest’s co-purchase of 301 Howard St. for $292.5 mil ($942/sf) from Vanbarton Group in August was the most expensive transaction of the year, and had a cap rate of 5.10%. The Blackstone Group sold the historic Ferry Building at the Port of San Francisco in October for $291 mil ($1,086/sf) to Hudson Pacific Properties (55% stake) and Allianz Real Estate of America LLC (45% stake). The third largest sale of 2018 was Northwood Investor’s purchase of 123 Mission St from HNA Property Holding Group of China for $290 mil ($839/sf) in June. Looking ahead to 2019, overall sales should improve as new investors, both foreign and domestic, fill the void that Chinese buyers have left since the imposition of capital controls. If the ongoing trade war can be resolved in 2019, it is possible that the Chinese government will also relax capital restrictions, which would significantly bolster the investment market for office property.


WeWork and other co-working space providers made a huge splash in the office market this year with some very notable leases throughout 2018, with the largest of the year being WeWork’s lease of 278.5k sf in the Union Bank building at 430 California St. in March. The top 18 co-working firms active in San Francisco occupy over 1.66 msf of office space combined. With vacancy rates at decade lows, co-working space has become a vital option for smaller companies and startups in San Francisco. The recent trend of co-working outfits leasing up space in the city does not appear to be subsiding, and in fact all indications point to 2019 being another year of expansion for co-working space in the city.

Source: RCA, CoStar, San Francisco Business Times, The Registry
*Figures and information for this report look only at industrial buildings larger than 15k sf

This report was provided by Jerry Holdner, Director of Research at Kidder Mathews

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