July 31, 2017
By: Susan Persin, Northern California Research Director
The Northern California megaregion isn’t the most populous in the country but it is one of the most productive. In 2014, the 21 counties making up our megaregion – from Yuba in the north to Monterey in the south – had a combined gross regional product of $875 billion, the highest of any region in the country.
This strong economy is evident in everyday things like housing affordability and commute patterns. It’s also apparent in the skylines of our largest commercial centers: San Francisco, Oakland, Sacramento and San Jose. JLL’s recently released 2017 Skyline Report analyses leasing activity and construction in 57 major cities around North America.
It’s not a big surprise to Northern Californians that San Francisco has the third most expensive office skyline in the country (behind Washington DC and New York City.) What might be surprising to some is that Oakland has the eighth most expensive skyline; that San Jose is edging toward the top 10 and that Sacramento isn’t that far behind.
Following are some key insights into our four Skyline office markets. You can access the full Skyline report here.
JLL’s Christopher T. Roeder sees San Francisco’s Skyline continuing to benefit from strong demand for quality office space with access to amenities and transportation, especially from homegrown “new age” headquarters companies and large technology companies expanding from Silicon Valley.
“San Francisco is especially in demand among companies seeking Millennial talent because the city is where most Bay Area Millennials want to live, work and play – you just have to look at the crowds in the Presidio, the Marina, or any of our city parks on the weekend to see that,” says Chris. “We have become a true 24-hour city, like New York, with talent continuing to congregate here and that ultimately attracts employers,” he adds.
Chris says that although the high cost of living, the need for more infrastructure and a tight labor market are the city’s biggest hurdles, there’s a bright spot in its all-important transportation infrastructure. With the Transbay Transit Center now well underway, and new Skyline-defining developments like Park Tower due for completion in 2018, employers will have iconic, transit-friendly space options in the city in the next 18-24 months.
Oakland’s Skyline has become a destination in its own right, as well as a magnet for companies priced out of San Francisco and looking for space closer to an East Bay workforce. Many creative and nonprofit firms, as well as a growing cadre of major employers, have moved into downtown. Blue Shield, for example, will anchor 601 City Center, now under construction. A dearth of construction in Oakland’s Skyline in the last 10 years has led existing space to fill up. At just 4.9 percent, Oakland boasts the lowest Skyline vacancy of any of the 57 markets tracked by JLL this year. Direct average asking rental rates have pushed north of $54 psf., and upward pressure on rental rates is unlikely to ease in the short term. “Until new construction comes online in 2018-2019, Oakland’s fundamentals will remain tight especially in Skyline buildings,” says Sam Swan.
Skyline vacancy in downtown Sacramento is 11.5 percent, down from a high of 17 percent in 2010. A quiet construction market – the last addition to the Skyline was Bank of the West Tower in 2009 – has been chiefly responsible for steadily declining vacancy and rents stretching above $35 per s.f. Owners of existing Skyline buildings have been updating and adding amenities, attracting solid tenant interest, both from within the downtown core as well as from some suburban markets. With no new construction even announced, rents are projected to continue upward in the short term, as more companies take the opportunity to snag a downtown address.
Downtown San Jose has been something of the forgotten child of Bay Area Skylines but despite a 12.4 percent vacancy rate, San Jose seems poised to come back to prominence, not least because of the prospect of a major tech campus around downtown’s Diridon Station. The expansion of public transport infrastructure is a big part of the story, with BART’s extension headed downtown in the next two years. A potential hi speed rail link to the Central Valley and then to LA could also tantalize employers.
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