Leasing in San Francisco Reaches New Low

As San Francisco’s commercial tenants continue to evaluate their internal operations and external conditions, leasing of office building space for April 2008 through the end of April 2009 declined, according to Studley’s analysis of office market conditions in the city and surrounding areas. The 5.4 million square feet leased in one quarter was less than the leasing volume in mid-2001, when fourth quarter leasing activity fell to its previous low of 5.7 million square feet.

At the same time, San Francisco’s space availability rate (defined as space available for lease whether vacant or currently occupied) rose to 18.2 percent overall as compared to 13.3 percent at the same time last year, and Class A space availability increased to 17.1 percent compared to 13.2 of the prior year.

“As the economic fallout continues, impacting all of San Francisco’s industry sectors, tenants are retrenching despite some market dynamics favorable to office space users,” said Steve Barker, co-branch manager of Studley’s San Francisco office. Class A asking rents was $34.74 per square foot at the close of the first quarter of 2009, a 25 percent decline from the $46.54 per square foot of one year before. Overall asking rents also declined, although not as dramatically, from $37.46 to $33.43 currently.

The legal sector, a San Francisco stalwart, has been hit the hardest with layoffs, and has forced some big-name tenants to sublet their space. After being engulfed by more than 2 million square feet of new sublease space in 2008, the San Francisco office market has already witnessed the addition of 1.26 million square feet of sublease opportunities during the first quarter of 2009. The most notable of the sublease blocks that was being offered was the financial services giant Charles Schwab & Co.’s 19 floors of headquarters space, totaling 375,000 square feet, in the Financial District North.

Studley predicts continued decline of the property values and rental rates for all classes of buildings, which may reach as high as 20 to 40 percent.