SF Office Market Sees Third Quarter Correction

SAN FRANCISCO-This city’s office market, having established itself as the premier market in the nation in the second quarter, experienced a slight correction in the ensuing three months, according to a new third quarter report issued by CB Richard Ellis.

The vacancy rate increased for the first time in 18 months, and space absorption was negative for the first time in two years, according to the report. Despite that, world-class rents continue to be asked and paid in core submarkets such as the Rincon and Financial districts, where rates have surpassed the $80 mark for new class A space, with $100/sf deals being made for the top floors of the best addresses.

Class B and C space, which experienced a slight increase in rents as class A vacancies hovered around 1%, saw those rates come back down as more class A space became available as tenants who had leased for growth, began subleasing space for profit. In March, subleases accounted for 6% of all available space. Now, it accounts for more than 20% of all available space.

Citywide vacancy increased from 1% in the second quarter to 2% in the third quarter, with total availability increasing from 3.6% in the second quarter rate to 4.9% in the third. As for absorption, class B and C space respectively posted negative absorption of 78,381 sf and 158,853 sf. Thanks to the 385,000-sf 199 Fremont project coming on line fully leased in the third quarter, class A space saw positive absorption of 31,950 sf. Rents on class A space citywide topped $77/sf on average, with class B and C space at $66.58 and $57.69, respectively.

Looking ahead to the fourth quarter, preleasing is down in fringe submarkets, according to the report. Of the 440,000 sf of renovations and new construction coming online in the fourth quarter in those submarkets, only 40% has been preleased. On the other hand, the 345,000 sf of new construction scheduled to come online in the North and South Financial Districts will be delivered fully leased.