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Office Is Like Residential: Scarce

The same pressures pushing up prices and pushing down availability of residential properties in San Francisco are active in the commercial office market, as well. With a rental growth rate of 10 percent over the past 12 months, San Francisco’s office market is getting ever-tighter. Few large blocks of space are available; with 35 prospective tenants seeking office space of at least 50,000 square feet but only three contiguous blocks of such space available, “the supply-demand imbalance is increasing competition and pushing rents upward,” reports Jones Lang LaSalle (JLL) in a new report.

Asking rents have risen from $31.37 per square foot in 2009 and $51.58 in 2012 to $66.11 in the first half of 2015. Vacancy rates meanwhile have dropped from a high of 17.1 percent in 2010 to just 9.2 percent this year.

With new development still capped by Proposition M limits imposed in the 1980s, things will not get better for renters any time soon.

“Although more than 3 million square feet of construction is underway, the majority is preleased, and new development is still constrained by the Prop M development cap,” says JLL. “Currently, there are more than 11 million square feet of projects filed with the Planning Department, but only 2.4 million square feet left for allotment [under the Prop M cap]. At the rate of job growth and leasing activity, supply restrictions will favor landlords and hurt tenants as rents continue to grow. Smaller and non-tech tenants are the most at risk and may start to seek space outside the city. Prop M’s supply limitations create a more demand-heavy competitive market that ultimately hurts tenants’ ability find affordable office space.”

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