The Peninsula Industrial Pros

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San Francisco Ranks First in the Nation for Lowest Office Vacancy Rate

All you have to do is look at the downtown office rents to realize that vacancy is tight and squeezing the rates in an upward fashion.  The article below from GlobeStreet uses JLL’s most recent report.  Good news if you’re a landlord, bad news if you’re a startup looking to get into the hottest office market on the planet.

By David Phillips

San Francisco is clearly leading a national trend toward lower office vacancies. Stronger leasing volume and more tenants growing pumped up the volume of occupied space by more than 10 million square feet nationwide during the quarter, the largest quarterly increase since the end of 2011, researchers report in Jones Lang LaSalle’s Second Quarter 2013 Office Outlook.

The San Francisco vacancy rate is now 11.3%, the lowest of any major metro.  Rental rates have responded in tandem, increasing by 62.8% since the bottom of the market in 2010, surpassing the previous peak and expected to climb further as demand remains strong.

Nationally, absorption reined in the overall vacancy rate to 16.9%, marking the first time that vacancy has ducked below 17% in five years.

San Francisco remains a high-growth economy with the booming technology industry driving the market out of a recession and into an expansionary cycle that has led to significant vacancy depletion, investment sales activity, and speculative developments.

With more than 34 million square feet leased since the depths of the recession, much of which was leased to accommodate expansions, San Francisco will continue to see vacancy decline as many of the largest leases signed in 2011 and 2012 begin to take occupancy.

“The expanding U.S. private sector is driving office occupancy gains to geographies that have lagged the domestic recovery for more than two years, including Atlanta, New Jersey, Chicago, Orange County, and Sacramento, among other markets,” said John Sikaitis, senior vice president and director of office research for the Americas at Jones Lang LaSalle.

After several years in which Houston and Dallas seemed to capture the lion’s share of growth in the U.S. office sector, tenants soaked up space and pressured down vacancy rates not just in those two markets, but in markets across the nation during the second quarter.

Even in New York and Washington, the two markets where tenant demand has been most sluggish of late, the highest quality office segment started to show signs of stabilizing demand and even rent growth, said Sikaitis, who also directs local markets research. “If this momentum holds, we could see a broader-based recovery in the two largest markets headed into 2014.”

Improving occupancy has enabled landlords in many markets to demand more rent. National average asking rent shot up 1.2% since the end of March, the highest quarterly increase since the recovery began in 2010. Asking rent surged 5.5% in lower Manhattan contributing to a 1.9% rent increase in New York, while Silicon Valley posted the second-largest rent increase at 4.9%. Tenant improvement allowances and free rent were down 4.7% and 8.5%, respectively, in the quarter from a year ago.

Read entire GlobeSt article here.

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This entry was posted on August 13, 2013 by in Market Updates, Office, Peninsula, San Francisco County and tagged , , .
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