San Francisco and Bay Area Office Report Q3 2019: Sales Volumes Set Multi-Year Highs As Lease Rates Rise

Key Takeaways:

  • 18 major office projects were completed in Q3 with 15 more expected by year-end
  • Sales volume sets a 5-year record at nearly $2.7 billion in San Francisco
  • Sales volume in the Bay Area set a multi-year high of more than $2.9 billion
  • Lease rates continue trending upward with trophy vacancies in San Francisco at just 2.3%

Completions Set to Remain Strong Through Year-End

Four properties were completed in the Bay Area and 14 were brought to market in San Francisco in Q3.

The 750,000-square-foot The Exchange on 16th has four connected LEED-Certified Platinum buildings that are fully leased to the cloud storage service company, Dropbox. Other multi-building office properties in San Francisco that were completed in Q3 include Menlo Gateway at 101 and 155 Constitution Drive, and Franklin Templeton Buildings 930 and 950 in San Mateo.

On the other side of San Francisco Bay, Moffett Towers II – Buildings 3, 4, and 5 added over 1 million square feet of LEED certified Class A office space to the Sunnyvale market.

15 more major projects are scheduled for completion in San Francisco and the Bay Area in Q4. Top completions include the 680,000-square-foot Chase Center in San Francisco and the 404,922-square-foot mixed-use Uptown Station project in Oakland with seven floors of office space currently available for lease.

$2.7B in Sales Sets a 5-year Record in San Francisco

San Francisco’s office sales volume increased by 270% in Q3 2019, compared to the same quarter in 2015. With nearly $2.7 billion in sales, it breaks the previous record of $2.6 billion, set in Q4 2016, according to the latest report from COMMERCIALCafé.

In the fourth quarter of 2016, 23 deals with an average price per square foot of $689 were needed to set that high. The 16 transactions completed in Q3 2019 averaged $770 per square foot—up Q-o-Q, but still below the record of $900 set in Q1 of this year.

Office lease rates in San Francisco have consistently risen this year, with the exception of Class C space where rates declined to levels not seen since last April. Rents for Class A+ space in September 2019 stood at $110.61 per square foot, after rising by more than 38% from December 2018 to January 2019.

Since last December, San Francisco office lease rates for Class A space have increased 18% with rents currently averaging $79.27 per square foot. Class B averaged $53.99 in September, an increase of 7.7% since last December, while overall office lease rates in San Francisco average $75.43, increasing more than 25% this year.

Trophy office properties in San Francisco continue to see strong demand with vacancy rates at 2.3% through October 2019. Rates in Class A and C properties averaged 6.5% and 6.4% respectively, while Class B office space in San Francisco is 10.3%. About 3.9 million square feet of the total office inventory in San Francisco is used for coworking and other non-traditional uses, representing about 2.6% of the total space in the market.

Bay Area Office Sales Also Set a Multi-Year High

With only 23 deals, Bay Area sales volume was more than $2.9 billion in Q3, breaking the previous record of about $2.5 billion set in the same quarter of last year. The number of deals was also the lowest since Q3 2015.

The average price per square foot in the Bay Area was $531, a slight decline from the two previous highs of $559 in Q1 of this year and $542 in Q3 of last year.

Average overall lease rates in the Bay Area have been trending upward since the beginning of the year. As of September 2019, Class A office rents averaged $59.21 per square foot, followed by Class B at $38.92, and Class C at $28.08.

Office vacancy rates in the Bay Area are slightly higher than in San Francisco. Class A space has an overall vacancy rate of 13% while the Class B rate is currently 15.6%. Class C space has the lowest vacancy rate in the Bay Area, ending the quarter at 9.5%. Coworking and flexible office use account for about 2.7 million square feet, or roughly 1.4% of the total office inventory in the Bay Area.

Top Transactions Exceed $3 Billion in Sales Volume in Q3

Yahoo! sold its seven-building Sunnyvale Complex to Google for $1 billion this quarter, making the deal Google’s second billion dollar purchase after acquiring HCP’s Britannia Shoreline Technology Park for $1 billion in November 2018.

Other major Q3 transactions include the Levi Strauss & Co. Headquarters and Levi’s Plaza—which is 99% leased to Levi Strauss until 2022—for $826 million, and Beacon Capital Partners purchase of 650 Townsend Street for $602,680,000.

For a complete and detailed picture of the Manhattan office market in Q3 2019, read the full report on COMMERCIALCafé.

Patrick McGregor

Patrick McGregor

Patrick McGregor is a senior writer covering the real estate industry and overall economic trends in the United States for several Yardi product publications. He also holds an MBA from Thunderbird School of Global Management. Patrick was previously a commercial real estate analyst at Yardi Matrix for five years. His work has appeared in the New York Times, Bisnow, GlobeSt, The Real Deal, Business Insider, The Denver Post, The Motley Fool, and more.