SAN FRANCISCO H1 2019 OFFICE MARKET

Continued expansion keeps job growth above Net Absorption - Employment national average Office net absorption Employment (services) - (rhs) The office market continued a positive expansion into million sqft variation the first half of 2019 with 625,000 SF of positive net ab- 6 6% sorption. High demand from technology companies has 4 4% created several unique lease deals including two leases for buildings which have yet to receive City approval. 88 2 2% Bluxome Street (Pinterest, 430,000 SF) and 550 How- ard Street (Salesforce, 325,000 SF). The economic out- 0 0% look in and the greater Bay Area contin- -2 -2% ues to improve, albeit slowing, with 2.1% year-over-year job growth in the period, 50 basis points higher than -4 -4% 06 07 08 09 10 11 12 13 14 15 16 17 18 H1 year-over-year national job growth (1.6%). Unemploy- 19 ment rates have reached a 40-year low in San Francis- Source: Bureau of Labor Statistics, CoStar, Transwestern co (1.9%) and have hovered around 2.0% for the past 12 months. Average asking rates drive up while supply of Prime Rent - Vacancy Rate large blocks dries up Office prime average rent Office direct vacancy rate - (rhs) San Francisco’s direct office vacancy rate at mid-year $/sqft/year 2019 was 4.5%, as the market tightens while demand 100 15% remains high. Notable lease transactions included two 80 12% leases at , Autodesk (118,000 SF) and Glassdoor (117,000 SF), while Samsara signed at 1 De 60 9% Haro Street (116,000 SF). Increases in average asking 40 6% rates, $80.93 PSF at the mid-year 2019, continue to be driven by the lack in supply of large blocks of office 20 3% throughout downtown (8.8% YoY increase). As of the 0 0% end of June there are no existing blocks of space over 06 07 08 09 10 11 12 13 14 15 16 17 18 H1 19 100,000 SF remaining, a significant challenge for ten- Source: CoStar, Transwestern ants that either have to break up their requirements or *asking rent look to markets in Oakland or the South Bay.

Investment sales rebound in first half of 2019 Investment - Cap Rate

Sales activity is off to an impressive start in the first half Office investment Other investment Office prime cap rate - (rhs) of 2019 with $5.4 billion in office volume so far, already $ bn surpassing total sales volume for 2018 by 17.4% ($4.6 billion). Notable transactions in the first half of the year 15 7% include two headquarters purchases and remaining mi- 12 6% nority stake at . The Gap, Inc. exer- 9 5% cised their purchase option for 550 Terry Francois Boulevard ($1,211 PSF; 4.4% cap rate) while Juul pur- 6 4% chased 123 ($1,149 PSF) for a new 3 3% headquarters location in the South Financial District. 0 2% Boston Properties (BXP) purchased the remaining 5% 10 11 12 13 14 15 16 17 18 H1 19 minority ownership stake at Salesforce Tower for a re- Source: RCA, CoStar, Transwestern ported $210.9 million, or roughly $2,969 PSF. Office Market Overview - USA

Inventory Net Absorption Vacancy Rate Office asking prime rent Occupier (million sqft) (million sqft) (%) ($/sqft/year) Market 2019 H1 2018 2019 H1 2018 2019 H1 2018 2019 H1 Atlanta 167 0.6 0.7 16.0% 16.0% 26.7 27.4 Chicago 286 3.0 1.4 15.5% 15.3% 43.5 44.4 Dallas/Fort Worth 290 4.0 2.5 16.4% 16.8% 25.7 26.0 Denver 142 3.0 0.9 9.4% 9.2% 28.3 29.0 Detroit 218 0.6 0.5 8.9% 10.7% 19.6 19.5 Houston 241 -0.5 0.5 16.3% 16.3% 51.4 52.4 Los Angeles 206 3.3 0.7 14.3% 14.1% 44.8 45.6 Miami 37 0.1 0.1 12.0% 13.9% 49.2 47.9 Minneapolis 91 0.9 0.2 15.7% 14.2% 25.9 24.3 New York/Manhattan 436 1.3 1.3 7.5% 7.3% 77.5 83.6 Phoenix 115 2.6 1.4 14.9% 14.5% 26.7 27.3 San Diego 63 0.8 0.5 13.3% 13.0% 34.6 35.4 San Francisco 122 5.1 0.6 4.7% 4.5% 83.2 85.3 Seattle 158 2.4 4.3 7.4% 7.6% 33.4 35.4 Washington DC 141 0.7 1.4 9.0% 9.0% 76.2 77.1

Total investment volume Office investment volume Cap rate Investment ($ million) ($ million) (%) Market 2018 2019 H1 2018 2019 H1 2018 2019 H1 Atlanta 11 160 7 100 2 940 1 260 6,50% 7,00% Chicago 16 710 3 710 6 570 1 030 5,60% 7,40% Dallas/Fort Worth 11 900 2 260 4 470 1 700 7,20% 7,10% Denver 5 990 2 760 2 990 1 560 7,10% 6,70% Detroit 430 1 350 60 111 8,38% 9,27% Houston 15 440 5 380 2 800 1 190 7,10% 6,00% Los Angeles 24 690 7 790 6 050 3 600 4,25% 4,25% Miami 4 140 4 280 1 030 1 170 5,50% 5,50% Minneapolis 4 610 2 130 1 580 1 100 7,50% 8,30% New York/Manhattan 30 470 9 670 19 070 7 720 4,00% 4,00% Phoenix 6 060 2 330 2 210 1 020 7,00% 7,20% San Diego 6 930 2 320 2 060 1 020 6,24% 6,35% San Francisco 6 480 6 280 4 380 5 390 4,83% 5,00% Seattle 6 080 4 720 3 390 4 060 6,50% 6,66% Washington DC 5 360 1 640 3 820 1 330 4,40% 4,80%

Source: RCA, CoStar, Transwestern

Vincent ROBION Head of Research for Alliances BNP Paribas Real Estate Paris - France [email protected]