Office rents in S.F. soar to record

Rise linked to tech firms gobbling up scarce space

San Francisco office rents reached a record in June as the continued growth of tech — now turbocharged by capital raised in a series of initial public offerings — met a severe space crunch.

Asking rents rose to $84.16 per square foot annually for the newest and highest quality offices in the central business district, according to commercial real estate brokerage Cushman & Wakefield. Citywide asking rents for such spaces, known as Class A, are up over 9% from the prior year.

The citywide office vacancy rate was 5.5% in June, down from 7.4% a year ago, according to Cushman & Wakefield.

“The San Francisco commercial real estate market just powers on,” Robert Sammons, Northwest research director at Cushman &

Wakefield, wrote in a market report.

Demand, mostly from the tech sector, shows no sign of stopping. Brokerage CBRE reported around 20 large tenants are seeking more space. The Chronicle previously reported that Google and Facebook both want to lease as much as 1 million square feet in additional San Francisco office space — room for more than 6,500 employees.

Google confirmed on Tuesday that it recently signed an office lease at the Ferry Building, its fifth San Francisco expansion since 2018. The deal was for around 40,000 square feet, according to brokerage data, smaller than the Mountain View company’s other deals in the city. That it was willing to settle for a smaller space may be one more sign of the city’s space shortage.

“Much of the space that is vacant is just scattered partial or single floors and not the big blocks — 50,000 square feet and greater — that numerous tenants in the market are hunting for,” wrote Sammons.

First Republic Bank signed the biggest lease of the second quarter. It expanded by 265,000 square feet at 1 Front St. Financial firms and companies in other sectors continue to scrap with tech companies for space.

The bank, which is headquartered in San Francisco, reported strong earnings for the first three months of the year. Revenue rose 12% from the prior year to $807.4 million. A First Republic spokesman declined to comment on its real estate plans.

The bank’s expansion is fueled partially by the rise of tech. Its clients include wealthy tech employees, and it could benefit from the wave of local stockmarket debuts — an example of how the booming tech sector also lifts the financial sector.

The initial public offering “opportunity is hard to measure,” said Jim Herbert, CEO of First Republic Bank, on an earnings call in April. “I would say it isn’t yet impacting the house prices or loan demand.” He said that could change by the fall, when restrictions on stock sales expire for some companies that went public in the spring.

San Francisco companies that have gone public continue to grow locally. Pinterest, Slack and Uber also signed office leases this year, with room for thousands of new employees.

Tech companies Autodesk and Glassdoor also signed deals at 50 Beale St. in the spring. In a sign of the city’s changing economy, construction firm Bechtel and Blue Shield, the health insurer, are both moving out of 50 Beale St. Sensor maker Samsara, software firm Workday and Sony’s PlayStation video game division also expanded.

Globally, San Francisco has the seventhhighest rents in prime buildings. It’s still behind financial powerhouses Hong Kong, London, New York, Beijing, Tokyo and New Delhi, according to CBRE. (San Francisco’s average office rents beat out New York.)

Downtown San Francisco’s office costs in top buildings, including service charges and taxes, are $130 per square foot, while Hong Kong’s Central district is the world’s highest at $322 per square foot, according to CBRE.

Only a handful of new office projects are being built, and future supply is constrained by San Francisco’s Proposition M, which limits the amount of office space that can be approved each year.

Only two large office projects are under construction without tenant commitments. Oceanwide Center has 1 million square feet of office space, but is seeking more financing to complete construction.

The other project, 415 Natoma St., broke ground last month as part of the 5M project, and will open in late 2021.

Hearst Corp., owner of The Chronicle, is a partner with Brookfield on 5M, but doesn’t own the office site.

Jason Bonnet, vice president of development at Brookfield Properties, said last month that tenant interest was strong. He declined to comment on specific tenants.

“There’s a shortage of office supply, as we all know,” he said. “We’ve got an amazing office building that numerous tenants would be interested in moving into.”

More deals are expected this year in projects that haven’t started construction. Those could potentially include the Flower Mart redevelopment, Mission Rock and 598 Brannan St.

“Tenants keep pushing further into the future into space that’s not deliverable for many years. Landlords are doing their best to assemble large blocks of space,” said Colin Yasukochi, research director at CBRE.

Office rents have been rising for almost a decade, since the recovery began in 2009, and the tech sector emerged as one of the biggest industries in the world.

“It’s been the driving force,” Yasukochi said.