Globe Street with CompStak Data: Investors Should Keep Eye on City Hall

We're so proud of our Research Analyst, Blake Toline, as his San Francisco 2013 Q4 report was featured on the Globe Street website. Great job, team!

Investors Should Keep Eye on City Hall

By Natalie Dolce | San Francisco
“Investors in 2014 will be keeping an eye on City Hall and are likely to snap up any building for sale that can benefit from reconstruction,” says Toline.
SAN FRANCISCO- With many asset classes ending the 2013 fiscal year on a positive note, the San Francisco real estate market was no exception. So says a recent report from CompStak. GlobeSt.com recently got a sneak peak at the firm’s Q4 2013 Effective Rent Report for San Francisco, written by Blake Toline, research analyst at the company, which said that the S&P 500 gained 30% in 2013 for its best performance since 1997, making many business owners and investors happy with the overall performance of the economy heading into 2014. San Francisco reaped the benefits of the booming technology sector with rapid rent increases earlier in the year. According to the report, “As Non-CBD rents continued their climb, CBD picked up the pace in Q4 after minimal rent increases in Q3. Overall effective rents increased by $2.69 in the last quarter and are up 11% year over year gaining $4.76 to $48.92 on a full service basis.” With the overall market performance of the past few years, decreasing vacancy rates, and no indication of a slowdown in the tech industry, the firm sees 2014 as another banner year in the San Francisco market and the surrounding Bay Area, says Toline. “Demand for office space in the San Francisco region was consistent in 2013 and will continue to be strong as investment dollars continue to pour in and the funding environment remains positive.” According to the firm, “Office rents in San Francisco’s CBD increased considerably in Q4, ending 2013 with three consecutive quarterly increases. Average effective rents increased $3.89 to $50.90 since Q3, and $5.13, or 11% since Q4 2012. Average concession packages for the year were down 140 basis points, from 8.6% to 7.2%, as compared to 2012 signaling more value being captured by landlords.” Demand continues to be strong for class-A office space in the North and South Financial districts as big name tenants sign new leases, adds Toline. Visa moved out of San Francisco in 2008 but returned this past quarter with a 100,000-square-foot lease at 1 Market St. taking floors in both the Spear and Steuart Towers. Xoom Corp. signed a 10-year 79,000-square-foot lease andFitBit signed a seven-year 60,000-square-foot lease at 425 Market St. and 405 Howard St., respectively. Increasing rents, decreasing vacancy, and a slew of developments such as the new Transbay Transit Center have led Non-CBD average effective rents up 12% in 2013, says the report. Submarkets in the vicinity of the new development, including Yerba Buena and Rincon-South Beach, have benefitted the most, adds Toline. In Q4, overall Non-CBD effective rents increased another $1.39 to reach just below $45 PSF, adding to a near $5 PSF increase from Q4 2012. The large development projects, despite recent opposition from several local groups, have begun accepting tenants and are expected to attract new retail and better transportation, says Toline. “Multiple residential developments are also underway to accommodate the growth in local workforce. A majority of the leases completed in the past quarter were new, including two large leases by Cengage Learning and Wix at 500 Terry Francois Blvd. in the vicinity of the Mission Rock development. The new Transbay center development grabbed the attention of Akamai Technologies and GoGrid who signed large leases at 799 Market St. and 2 Harrison St., respectively.” According to Toline, we should expect the development areas to continue to be in high demand in 2014, although it is often difficult to predict how many projects will go through the city’s approval process, he says. “Investors in 2014 will be keeping an eye on City Hall and are likely to snap up any building for sale that can benefit from reconstruction.” CBD office rent spreads contracted slightly, explains Toline, reaching $6.36 per square foot despite consistent increases in asking rent. This contraction, he says, signals strong tenant demand and realistic landlord expectations for additional rent increases. “As economic indicators look positive for 2014, we expect that spreads will either contract or remain flat, while both asking and starting rents will continue to increase.” Spreads continued to narrow in Non-CBD submarkets for the third consecutive quarter, he adds, where the average spread is now $5.28 per square foot. “Landlords cautiously increased rents throughout the year, and strong demand pushed starting rents up, tightening the market further. 2014 will likely be a landlord‘s market, with more aggressive increases and slightly wider spreads.”

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