February 22, 2018
By: Susan Persin, Research Director, Northern California, JLL
A string of four mega leases, all closed in the fourth quarter of the year, capped a record-setting year for San Francisco’s office market. With 18 leases over 100,000 square feet, 2017 surpassed 2014 for major leases signed. Around Northern California, other records were set. Here are highlights for the region’s major submarkets, along with our outlook for 2018.
SAN FRANCISCO OFFICE MARKET, Q4 2017
- Four deals larger than 100,000 square feet drove leasing activity in Q4 2017. With 18 deals greater than 100,000 square feet closing, 2017 surpassed the previous record of 17 leases in 2014.
- About 4.7 MSF of new supply to be added to market by year-end of 2018. Of the 4.7 MSF to be delivered in 2018, 80.2 percent is pre-leased.
- Total vacancy marketwide is 8.1 percent (6.9 percent direct vacancy). Average rents marketwide (all submarkets, Class A-C buildings) are $74.27 PSF with Class A rents in the financial district (CBD) topping $76.13 PSF.
- Outlook: Vacancy rate for Class A office expected to rise as major new developments deliver with large block availability but also look for a continued uptick in average rents in Class A as new projects will command some of the highest average asking rents in the City.
SILICON VALLEY OFFICE MARKET, Q4 2017
- Corporate consolidations have added vacancy to the market and will continue in 2018. These consolidations have occurred primarily within the local hardware sector where there has been a significant number of M&A deals to close. Despite the rise in vacancy, demand for office is steady. Tenant requirements in the 50-100k SF range have increased, and the lack of traditional multi-tenant space is driving the demand for smaller space requirements.
- Average asking rents throughout the Valley are $50.52 PSF.
- Outlook: vacancy expected to rise slightly as more space is expected to hit the market, but will be driven down once tenants who signed large deals occupy in late 2018. Smaller requirements will rise in response to several major redevelopment project that will uproot existing tenants into the market.
SACRAMENTO OFFICE MARKET, Q4 2017
- Despite lower net absorption (613,154 s.f.) than the prior year, 2017 was a good year for the Sacramento office market and ended on a positive note. Office vacancy dropped a full percentage point to 12.2% by year end (In 2013, vacancy was 19.4%).
- The CBD market saw negative absorption in 4Q 2017 but this was solely due to the Sacramento Kings moving their business office from 660 J Street to their own property at the Sawyer Hotel near the Golden 1 Center.
- Office rents in downtown Sacramento are growing at twice the rate of rents in the suburban markets and stand at $2.82 per square foot vs $1.86 per square foot in the suburbs.
- Outside downtown, the Highway 50 corridor is the place to be for tenants due to both large availabilities and affordable rents. Vacancy in this market is 16% and rents average $1.74 per square foot. One of the biggest 4Q deals was health insurer Centene’s leasing of 178,119 s.f. on International Drive in Rancho Cordova.
- Outlook: Sacramento is on course to become a landlords’ market in 2018. No new construction is underway and with few large availabilities and rents rising CBD tenants looking to expand or consolidate, especially into large spaces in the next 12-24 months, may see few options.
MID PENINSULA OFFICE MARKET, Q4 2017
- Demand in the Caltrain corridor is strong, but larger availabilities in suburban regions are attracting full floor tenants in need to expansion space. Meanwhile, softer submarkets in North County submarkets are gaining some traction among cost-conscious tenants. Subleases are propping vacancy, but are gaining traction as rents are experiencing stable growth.
- Average asking rents throughout the Peninsula are $66.27 PSF.
- Outlook: Occupancy levels will stay positive as newly built pre-leased space is occupied and tenants start to look away from the Caltrain corridor for more affordable space that allows growth. Additional new development could break ground, but it will likely center near Caltrain stops given the supply/demand imbalance in downtown micromarkets.
OAKLAND CBD OFFICE MARKET, Q4 2017
- Oakland’s CBD market maintained its strength throughout 2017. Average asking rents climbed 11.0 percent year-over-year, pushing $60 per square foot fully serviced. The rent gap between Class A ($60.48) and renovated Class B ($57.48) buildings has narrowed substantially in Oakland’s CBD market, thanks to ongoing demand and a lack of availability in existing Class A product. Total CBD vacancy is just 6.7 percent.
- San Francisco-based tenants inked the largest deals this year, totaling as much as 360,000 square feet of leasing activity at year-end. Clovis Oncology is the latest tenant to expand into Oakland, leasing 32,000 square feet in Q4.
- Low vacancy and value-add opportunities attracted significant investment activity to the Oakland CBD, with 2017 sales volume totaling more than $540 million. CIM Group purchased Uber’s Uptown Station at 1955 Broadway for $180 million in December. The new owner is moving forward with renovations and is set to deliver the building in early 2018.
- As much as 1.4 million square feet of new or redeveloped office space is set to deliver in the next 24 months. 601 City Center and 1100 Broadway are currently under construction (set to deliver early 2019), of which are 30.0 percent and 41.0 percent leased, respectively. Redevelopments include 2201 Broadway, 2150 Broadway, Uptown Station, and Tribune Tower.
- Outlook: Tenants looking at the CBD market will get some relief over the next 24 months as new and renovated offices add to supply.
I-680 Corridor (East Bay) OFFICE MARKET, Q4 2017
- Investment activity is driving much of the momentum in submarkets throughout the I-680 corridor, as institutional buyers look to trade for suburban “transit-oriented” office buildings, especially those close to BART stations. In the past 12-18 months nearly all of Walnut Creek’s Class A assets traded.
- Touring activity has been strong for larger users in the South 680 Corridor, but recent large block availabilities in the North 680 Corridor opens up the market.
- Outlook: Average asking rents (currently $36.00 PSF) have risen steadily over the past five years and are expected to maintain an upward trend for the foreseeable future.
Marin/Sonoma (North Bay)
- October fires in Sonoma County and the North Bay dominated the residential market in 4Q 2017 but while the fires totaled more than $7.5 billion in property damage, the cost to the commercial office sector was minimal. Office vacancy in Sonoma County was 8 percent at year end.
- Northern Marin County (Novato, n. San Rafael) has a 19.6 percent vacancy rate — much of it in the Class A market – so offers some of the best options for tenants looking to expand or relocate. Total vacancy throughout Marin County is 13.7 percent. Total combined vacancy (Sonoma and Marin) is 10.5 percent.
- Total absorption (year to date) of office space in the North Bay was 134,884 s.f. In the fourth quarter.
- Outlook: With more positive absorption expected, especially as architects, engineers, construction companies and other vendors open satellite offices to service rebuilding of fire damaged neighborhoods, and with no new construction underway in Sonoma or Marin counties, vacancy is expected to drop from 10.5 percent in the coming months. The comparative affordability of North Bay office space — the average asking rent across all office types in the North Bay market is $28.92 per square foot (gross) — is also expected to drive greater demand in 2018.
Full downloadable reports on 2017 fourth quarter activity in all of the major Bay Area submarkets are available at the following links:
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