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Market Pulse: San Francisco, July 2019

Welcome to the first edition of NAI Northern California’s newest feature. We checked the pulse of the San Francisco commercial real estate market to discover the ups and downs of the office, industrial, retail, and multifamily markets.  Each market has four dimensions: current inventory, 12-month net absorption, under construction, and vacancy rate.

Check out our July 2019 San Francisco Market Pulse infographic. If a dimension is on the rise, the pulse goes above the baseline; if it’s on the decline or negative, the pulse will dip below the baseline.

This month the San Francisco office market’s inventory is up to 175 million sq. ft., with 12-month net absorption down at 2 million sq. ft. of office space. Approximately 6.9 million sq. ft. are under construction with an upward trend. The vacancy rate is rising, at 6.3 percent.

For more detailed updates or to find out how San Francisco’s submarkets are doing, contact one of our advisors; whether you’re interested in office, industrial, retail, or multifamily properties, we can help.

Foreign Investment Rising for Net Lease Assets

Foreign investment in commercial real estate is on the rise due to the search for yield and portfolio diversification, according to the World Property Journal. Globally, investment in net lease properties (office, retail, and industrial) averaged $3 billion per year from 2011 to 2014 and is up to more than $8 billion per year from 2015 to 2019. In the United States, foreign investments for Q1 2019 represented 15.1% of net lease transactions, totaling $1.9 billion, up 6.6% compared to Q1 last year when they only represented 12.9% of the market. In 2018, foreign investors held 30.1% more net lease properties than in 2017, an $8.8 billion increase.

Most of these investors are from Canada, South Korea, and China. Canadians invested $5.55 billion, with a focus on industrial properties; South Koreans invested $3.28 billion, overwhelmingly preferring office space; and Chinese investments of $3.22 billion also focused on industrial assets.

So far this year, New York City, San Francisco, Boston, Dallas, Columbus, and Los Angeles have received the most foreign capital, but commercial real estate investments in high-growth secondary and tertiary markets like Phoenix, Seattle, Baltimore, and Atlanta are also becoming popular.

Source: World Property Journal

Sneak peek: Office Depot debuts co-working space in Los Gatos store

Office Depot is piloting its first-ever co-working space inside a retail store at its Los Gatos location.

The move comes as the office supplies retailer looks to edge in on co-working giants like WeWork by offering workspace for freelancers, small business owners and remote workers.

The space inside the store at 15166 Los Gatos Blvd. is called Workonomy Hub.

Much like WeWork, Workonomy offers options ranging from renting a desk in a common area ($40 per day) to private offices ($750 per month). The space also includes high-speed Internet, free refreshments, business services like printing, shipping and mail and package handling, and, of course “easy access to office supplies.”

“The combination of Office Depot’s current suite of products and services with a physical co-working space creates a comprehensive offering for small business owners, entrepreneurs and remote employees under one roof,” the company said in a statement.

Read more on San Francisco Business Times

Square Inc. expands Mid-Market headquarters office in one of San Francisco’s biggest office leases this year

Payments processing company Square Inc. added another 104,135 square feet to its Mid-Market headquarters in San Francisco.

The company will now occupy a total of 469,056 square feet in 1455 Market St., a 1 million-square-foot office building.

The deal was one of the largest of the second quarter for landlord Hudson Pacific Properties (NYSE: HPP), which reported earnings Wednesday.

“We had a strong second quarter, particularly in terms of leasing,” said Victor Coleman, Hudson Pacific Properties’ chairman and CEO, in a statement. “Already standout West Coast market fundamentals continued to improve.”

Twitter co-founder Jack Dorsey started Square in 2009 with 10 employees. The company’s technology enables business owners to process credit card payments and makes a credit card reader for cell phones. The company reported revenue of $809 million in 2017 and now has about 2,300 employees in San Francisco, Canada, Japan, Australia, Ireland, and the United Kingdom.

Square first moved into 150,000 square feet in 1455 Market in 2012 with plans to expand into 327,423 square feet over time. The company was among a wave of tech companies that flooded into Mid-Market during a revitalization of the area that is still in process.

Read more on San Francisco Business Times

 

 

What WeWork’s retail debut says about the state of retail

The company that’s shaking up office markets just took a major step into retail.

WeWork recently launched a new business concept, dubbed WeMRKT, at the co-working giant’s 205 Hudson location in New York City. WeMRKT is a small shop that sells products created by WeWork members, and while there’s currently only one location, WeWork said it plans to expand the concept nationally.

WeWork’s decision to step into retail comes at a turning point in the market. From Toys R Us to Nine West, retailers across the country are filing for bankruptcy at record levels as consumer shopping habits continue to shift.

But not all retailers are struggling. Discount shops are booming while retailers who effectively employ creative, omnichannel strategies are finding success.

WeWork’s new concept is another step in retail’s evolution. From the fusing of the office and retail sectors to new opportunities for brick-and-mortar, here’s what WeWork’s foray into retail says about the current state of the market.

 

 

Read more on Apto

 

 

 

The era of big leases is over as San Francisco awaits next crop of towers

The era of massive office leases — including the likes of Salesforce, Dropbox and Facebook — is coming to a halt now that most of San Francisco’s pipeline of new office buildings is spoken for. Robust demand for office space has filled up buildings months or years ahead of completion, but development is drying up.

In May, another company declared it had signed the “biggest office lease ever” in San Francisco. The trend of going bigger and bigger started with Salesforce taking 714,000 square feet in Salesforce Tower at 415 Mission St. in 2014 followed by Dropbox taking 736,000 square feet in 2017 in the Exchange in Mission Bay. Then Facebook topped both with a deal to gobble up the entire, 750,000-square-foot Park Tower.

But, the era of massive office leases is coming to a halt — at least for the next few years — now that most of San Francisco’s pipeline of new office buildings is spoken for. Robust demand for office space has filled up buildings months or years ahead of completion, but development is drying up.

Some industry insiders say more building would be going on if it weren’t for Proposition M, a 1986 voter-approved law that limits how much office space can be approved in a given year. Still, others say that factors such as the lengthy city approval process and availability of development sites has also put the brakes on office development.

 

 

Read more on San Francisco Business Times

 

 

Amid office space crunch, Google grows in San Francisco

As its fellow tech giants jockey for space in downtown San Francisco, Google has signed another office lease in the southern Financial District, The Chronicle has learned.

The Mountain View company is taking an additional 57,299 square feet at Hills Plaza at 2 Harrison St., according to real estate data company CoStar. That brings the total in the complex, where Google has had an office since 2007, to more than 400,000 square feet.

Google did not respond to a request for comment. Architecture firm Gensler occupied the space before recently moving to 45 Fremont St. A Morgan Stanley investment fund owns Hills Plaza.

Google is also in talks to sublease space from Salesforce, two sources said. The potential deal could be up to 228,000 square feet at Rincon Center at 101 Spear St. No contract has been signed.

Salesforce is one of the few large tech tenants vacating space as it consolidates workers into Salesforce Tower, which opened in January, and adjacent buildings. Salesforce, the city’s largest tech employer with 7,500 employees, is also subleasing space at the Landmark building at One Market Plaza.

Google’s expansion follows office leases by Facebook, Dropbox and other fast-growing tech companies, which have broken records for size and made San Francisco one of the priciest and tightest office markets in the country.

The office vacancy rate in San Francisco’s southern Financial District, which includes the area around the Transbay Transit Center, is 4.6 percent, down from 6 percent in the first quarter, according to CoStar.

“The new development has pretty much been snatched up,” said Jesse Gundersheim, CoStar’s San Francisco market economist. “Opportunity like sublease space from Salesforce is pretty rare.”

Read more on The San Francisco Chronicle

 

 

Exclusive: 44-story Transbay tower proposed next to transit center

Another tower could join the forest of new skyscrapers in San Francisco’s Transbay district.

New plans for a 44-story highrise at 540 Howard St. call for 149 housing units and 52,403 square feet of office space. An existing three-story building, which houses Temple Nightclub, would be demolished.

The site is next to numerous massive projects, including the $2.2 billion Salesforce (formerly Transbay) Transit Center. On a neighboring parcel, Hines and Urban Pacific Development have proposed a 60-story, 800-foot tower with housing, office and a hotel at 550 Howard St., known as Parcel F. Developer Crescent heights has approval for a 495-foot residential tower at 524 Howard St., but the project has been delayed. Rising construction costs have made towers more challenging to build.

Warner Schmalz, an architect at Ankrom Moisan, is designing the 540 Howard St. project. The firm said he wasn’t immediately available to comment. property owner Wendy Hemming couldn’t immediately be reached for comment.

It isn’t clear how tall 540 Howard St. would be, but the site is zoned for 450 feet, or less than half the height of the nearby 1,070-foot Salesforce Tower.

 

Read more from San Francisco Business Times

 

 

 

Workplace needs a place to chill, Millennials say

What is one thing millennials want in an office that their parents probably never thought of? A place to relax.

That is the conclusion of a survey conducted by U.K. office interior specialist Dale Office Interiors, which found that over a third of 18- to 34-year-olds would favor prospective employers offering “chill-out zones.”

There is no exact definition of a chill-out zone, but presumably most people know it when they experience it. Previous generations understood the concept, but few thought of the workplace as a place for chilling out. Home, certainly. A bar, maybe, for those in a certain mood. But not the office.

“People want to enjoy working, playing, essentially they want to enjoy life!” Allford Hall Monaghan Morris founding partner Simon Allford told The Architects’ Journal. “Buildings need to enable this by offering a range of different working and relaxing spaces on the micro scale of the office and on the macro scale of the building.”

Overall, what millennials want is of high interest to employers. In the U.S., Google searches for “how do millennials want to work and live?” increased from zero in 2015 to 15,900 in 2016 and 13,400 in 2017, according to Fresh Business Thinking.

 

Read more from Bisnow

 

 

WeWork signs biggest lease of Q1 in San Francisco

WeWork just added 251K SF to its San Francisco footprint.

The co-working provider inked the city’s largest lease of the first quarter at the Union Bank Building with landlords Kennedy Wilson and Takenaka Corp., the San Francisco Business Times reports. WeWork signed an 18-year lease for all 20 floors and plans to renovate the building.

The JV bought the building at 400/430 California St. in 2016 for $135M when it was fully leased to MFUB Union Bank, which plans to vacate the building.

The co-working company began occupying it newest location this year at Salesforce Tower, where it leases 75K SF. WeWork has rapidly expanded its Bay Area footprint in recent years and signed leases for over 1M SF in 2017. It also has expanded into Oakland, San Jose and Mountain View within the last two years.

WeWork Managing Director for U.S. and Canada West Jon Slavet told the San Francisco Business Times that the company cannot keep up with demand in the Bay Area, where its community is now over 13,000 members. Its members range from startups to enterprise businesses.

WeWork plans to open its first phase at 430 California during Q1 2019.

Read more from Bisnow