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Office-space occupancy sees bump in San Francisco

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What a difference a year makes.

Last year at this time, The City was reeling from the loss of 15,000 jobs that resulted in millions of square feet of office space being vacated.

Fast-forward to now: Occupancy of San Francisco office space increased by 685,000 square feet (positive net absorption) in the first quarter of 2011. Even more impressive, office occupancy has grown by 2 million square feet in the past 12 months, only the fourth time in history that San Francisco has ever absorbed 2 million square feet in any 12-month period.

Click on the photo to the right to see a graphic about office space.

Increase in occupancy drove the vacancy rate down to 13.8 percent at the end of the first quarter. The vacancy rate was 16.45 percent a year ago, and 14.7 percent at the end of 2010.

The tech boom south of Market Street continues unabated. Spaces in brick buildings with exposed ceilings are in extremely high demand and very limited supply, and rents are spiking: Class B buildings in SoMa now command rents well into the $40s and sometimes even $50s per square foot, higher rent than all but the most-premium space in Class A buildings in the traditional Financial District.

Most of the first quarter’s 685,000 square feet of positive absorption occurred in the north and south Financial District — not SoMa, perhaps because SoMa is already so full — and rents are rising downtown as well as in SoMa.
And preliminary reports indicate that second-quarter statistics will show more of the strong growth seen in the first quarter.

Market conditions are vastly different from a year ago. Occupancy is surging and vacancies are dropping.

Paradoxically, good economic news makes the market less favorable for office tenants. Good spaces are still available but are being gobbled up quickly, sometimes as a target of multiple offers from competing tenants.
Rents are rising quickly. Tenants are well-advised to act quickly to take advantage of market conditions before the pendulum swings too far in favor of landlords.

Frank Fudem is a senior vice president and partner with Cassidy Turley BT Commercial. He has represented corporate tenants in office space transactions for more than 25 years. Contact him at ffudem@ctbt.com.