San Francisco Commercial Real Estate to Be Expensive Forever

Scott Lucas | November 11, 2014 | Story Real Estate

Have you been hoping that San Francisco's red hot real estate market would show some sign—anything, really—of trending back towards earth? Bad news for you today, as real estate brokers Cushman and Wakefield report that our business space crunch is likely to continue.

In a new report, the company says that "although 2.5 million square feet of new class A space is coming online over the next three years, most of it is pre-leased by both new and expanding tenants. The outlook for the San Francisco market is favorable for the next two years." Translating that from white paper argle-bargle: The city is building plenty of new office space, but it still isn't enough. Worse yet: Some of those new buildings could "create aesthetic tangle" (!)

Demand for new office space is so tight that companies are snapping up anything they can get. Just look, for instance, at Salesforce—which, despite plans for a giant new downtown tower, is also buying a half million square feet of space at the 50 Fremont skyscraper, according to the San Francisco Business Times. One skyscraper isn't enough? Better buy two!

All told, S.F. is expected to increase its commercial real estate inventory by less than five percent over the next three years. Seattle, by contrast, is on track to increase by 20 percent over the same time period. Though there's a strong argument to be made against overbuilding in boom times—only for the building to lie unused in weaker times—San Francisco is growing at a much slower rate than places such as Boston and Mexico City.

In combination, that lack of growth and increasing demand have led to one of the world's tightest markets. According to Cushman and Wakefield, the vacancy rate for Class A office space in San Francisco in 2014 was 7.5 percent. New York city had 10.2 percent free. Washington D.C. had 14.8 percent. (The exception was Houston, at 7.4 percent. Go figure.) As a result, San Francisco's commercial rents are high—$63.53 per square foot per year. That's second in major US markets only to New York City's $69.80. And though we are adding new supply, given current economic conditions it won't be enough to slow the growth of commercial rents, which are expected to grow six percent by 2016.

Good news if you happen to own land—or work in real estate. Not so great for everybody else.

Read the whole report here.

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