SAN FRANCISCO OFFICE REPORT Supply Wave Offers Test For

Market Analysis Supply Wave Offers Test Second Quarter 2017 For Booming Office Market Contacts

Jeff Adler Vice President & General Manager of Yardi Matrix [email protected] (800) 866-1124 x2403

Jack Kern Director of Research and Publications [email protected] (800) 866-1124 x2444

Chris Nebenzahl Senior Analyst [email protected] (800) 866-1124 2200

Veronica Grecu Senior Real Estate Market Analyst [email protected] (306) 955-1855 7583 As the leading technology market in the United States, San Francisco has Alex Girda exhibited the economic volatility that comes with the boom-and-bust nature Senior Editor of the Internet and software industry. Over the past decade, a significant influx [email protected] of venture capital has produced numerous startup firms and expansion among industry leaders. The strong and steady growth has impacted the city’s office market, leading to high occupancy rates and a robust development pipeline, with 9 million square feet currently under construction. Aggregated and anonymized expense and lease expiration Roughly 28,000 jobs were added in the 12 months ending in March, bolstered data is available to Yardi Matrix by the city’s tech sector and its proximity to Silicon Valley. Office-using subscribers. Please contact employment in San Francisco grew at a rate nearly twice the national us for details! average in 2016, leading to more job gains in high-paying positions.

Leasing activity continued at high levels in the most established tech

For more information please contact: submarkets—such as South Beach, South of Market and Mission Bay—where high-quality space is being added. Rates were highest in the Silicon Valley- Ron Brock, Jr. Industry Principal, Matrix adjacent Menlo Park-Palo Alto submarket, where average leases hit $72.49 [email protected] per square foot, while the Financial District claimed average rates of $63.06 as (480) 663-1149 x2404 of June. Roughly 57% of office stock is Class A, as is the bulk of listed space.

To Subscribe: Strong investor interest led to more than $6 billion in office asset trades in Hollie Zepke the 12 months ending in June. Investors were focused on the more established Audience Development Specialist submarkets such as the Financial District and South Beach, where the bulk of [email protected] transactions occurred. Activity has exacted pressure on area acquisition yields, (800) 866-1124 x5389 leading the average for Class A urban assets to fall below the 5% mark.

1 Economic Snapshot

San Francisco counted roughly 430,000 office-using jobs at the end of 2016, accounting for 38.5% of total employment, one of the highest rates in the nation and nearly double the national share of 21.7%. That’s consistent with the rate of growth of office-using employment, which grew at 4.5% in 2016, 220 basis points above the national rate. The metro has experienced rapid employment growth throughout the second half of the current cycle, pushed forward by the availability of venture capital and its tech segment.

Office-Using Employment

Source: Bureau of Labor Statistics (BLS). Data as of June 2017

San Francisco Employment Growth by Sector (Year-Over-Year) as of June 2017 Current Employment Year Change Code Employment Sector (000) % Share Employment % 65 Education and Health Services 203 13.5% 5,900 3.0% 90 Government 191 12.7% 4,400 2.4% 70 Leisure and Hospitality 199 13.3% 3,900 2.0% 15 Mining, Logging and Construction 65 4.3% 3,800 6.3% 40 Trade, Transportation and Utilities 222 14.8% 3,800 1.7% 80 Other Services 58 3.9% 2,700 4.9% 60 Professional and Business Services 318 21.2% 2,000 0.6% 50 Information 76 5.1% 1,500 2.0% 55 Financial Activities 95 6.3% 400 0.4% 30 Manufacturing 75 5.0% -600 -0.8% Sources: YardiMatrix, Bureau of Labor Statistics

Office-Using Employment as a % of Total Employment

Source: Bureau of Labor Statistics (BLS). Data as of June 2017

San Francisco Office Report | Second Quarter 2017 2 Leasing Trends

Average leases in Class A office buildings rose 6.2% year-over-year through June, clocking in at $51.30 per square foot. Leases for Class B properties improved by 3.6% through that same interval, reaching an average of $40.50 per square foot.

In addition to being the nation’s largest tech-driven economy, San Francisco is the West Coast’s financial services leader. Office space comes at a premium in established submarkets such as the city’s Financial District ($63.06), and in submarkets in Silicon Valley such as Menlo Park-Palo Alto ($72.49).

Average leasing rates are rapidly growing in Mission Bay ($54.98) and South Beach ($53.86), where significant construction is underway.

South Beach led all submarkets in leasing activity year-over-year through June (5.6 million square feet), topped by Salesforce occupying 868,000 square feet at 415 Mission St., the largest lease signed in the past 12 months.

Lease Rate Growth ($ Per Square Foot) Lease Rates by Submarket

Avg. Lease Rate Top 5 Submarkets as of June 2017 Menlo Park-Palo Alto $72.49 Financial District $63.06 San Rafael $55.37 Mission Bay $54.98 South Beach $53.86

Source: Yardi Matrix. Data as of June 2017

Top 10 Leases Signed (Last 12 Months)

Address Square Feet Leased Tenant 415 Mission St. 867,982 Salesforce 211 Main St.. 371,825 Charles Schwab 430 California St. 247,000 Union Bank 2100 University Ave. 214,052 Amazon 3050 S. Delaware St. 210,000 SurveyMonkey 100 Independence Drive 205,222 Facebook 350 Bush St. 185,000 Amazon 101 Oyster Point Blvd. 163,000 AstraZeneca 303 Second St. #800 N. 150,000 AppDynamics 395 Hickey Blvd. 140,000 Kaiser Permanente

Source: Yardi Matrix. Data as of June 2017

San Francisco Office Report | Second Quarter 2017 3 Listings and Vacancy

Roughly 5.4 million square feet of office space was listed as of June 2017, at an average asking price of $54.71 per square foot for Class A and A+ space, and $45.07 per square foot for Class B.

In spite of the premium put on office space in the market, overall vacancy remains relatively low, at 8.5% as of June. A large slate of new office space is set to be delivered over the coming quarters, but strong leasing is already pointing toward maintained vacancy levels in the short term.

San Francisco’s CBD posted an average vacancy rate of 8.0%, with 1.7 million square feet of space currently available for lease. Vacancy is lowest in the market’s secondary urban quadrant (5.7%), as the high asking rates in the CBD and urban primary regions have led to a contraction of availability in secondary locations.

Suburban assets maintained relatively low vacancy rates year-over-year, as fast absorption is eating up available space within the San Francisco city limits. Meanwhile, increasing asking rates are pushing tenants to look for space in fringe submarkets. As a result, vacancy in primary suburban (11.4%) and secondary suburban (10.5%) areas will likely decline.

The Mission Bay submarket boasts one of the metro’s lowest vacancy rates (5.6%), but that may change given the more than 2 million square feet of space under construction. At 26.7%, vacancy is highest in the Colma- Brisbane submarket, which is just outside the San Francisco city limits. A wave of new developments in the urban core has attracted the attention of urban-focused tenants.

Available Properties Vacancy by Location Class

Square Feet Properties Location Class Vacancy Rate Top 5 Submarkets Available Available Suburban - Primary 11.4% Foster City 773,624 19 Suburban - Secondary 10.5% Financial District 598,549 37 CBD - Primary 8.0% Redwood Shores 541,354 14 Urban - Primary 7.1% San Mateo 434,214 21 Urban - Secondary 5.7% South Beach 379,273 20 Source: Yardi Matrix. Data as of June 2017 Total Market 5,409,199 230 Note: Vacancy including sublease. Source: Yardi Matrix. Data as of June 2017

Vacancy by Submarket

Top 5 Submarkets Vacancy Rate San Francisco - Southwest 3.4% North Beach 4.2% South San Francisco 4.2% San Rafael 4.5% The East Side 4.5%

Source: Yardi Matrix. Data as of June 2017

San Francisco Office Report | Second Quarter 2017 4 Supply

Although new office space has been added at a steady rate over the 12 months ending in June, deliveries are set to spike in 2017, as nearly 5.7 million square feet of office space is projected to come online. That’s just 150,000 square feet more than the total developers added to the market between 2014 and 2016.

Work is underway on 29 projects totaling roughly 9 million square feet of office space, with an additional 22 million square feet in the planning and permitting stages. San Francisco’s office pipeline points toward heightened development activity throughout the coming years.

Development activity is high in established submarkets located within San Francisco’s city limits such as South Beach (3.6 million square feet) and Mission Bay (2 million square feet). The largest property scheduled to come online in 2017 is the 1.4 million-square-foot Salesforce Tower in South Beach, at the heart of the San Francisco Transbay redevelopment plan.

Office Completions(Square Feet)

Source: Yardi Matrix. Data as of June 2017

Construction Activity (Total Square Feet) Construction Activity (% of Inventory)

Square Feet Under Square Feet Under Top 5 Submarkets Construction Top 5 Submarkets Construction South Beach 3,643,728 Potrero Hill 132.7% Mission Bay 2,062,026 Millbrae - Burlingame 42.2%

Millbrae - Burlingame 689,810 Mission Bay 32.2% Foster City 397,000 Sebastopol 24.7% Colma-Brisbane 391,794 Colma-Brisbane 24.1% Total Market 8,893,846 Total Market 8.6%

Source: Yardi Matrix. Data as of June 2017 Source: Yardi Matrix. Data as of June 2017

San Francisco Office Report | Second Quarter 2017 5 Transactions Transaction Volume

Investment activity in San Francisco topped Total Transaction Total Transaction $6 billion for the 12 months ending in Top 10 Submarkets Square Feet Volume (000s) June, as the market has seen no drop in demand from institutional investors. This has Financial District 285,990 $3,352,414 led to compression of acquisition yields for South Beach 236,444 $1,398,582 both CBD and suburban assets throughout Foster City 115,414 $292,380 the past four quarters. Yields are lower only Menlo Park-Palo Alto 145,000 $175,250 in other core investment markets, including New York City, Boston and Seattle. North Beach 109,846 $150,750 Mission Bay 63,161 $144,170 Investor appetite was high in the more San Bruno 136,777 $104,000 established submarkets, especially the Financial District and South Beach, where San Mateo 117,248 $89,654 more than $4.7 billion in deals were Civic Center 180,363 $70,000 completed, encompassing 23 assets with Roseland 133,091 $67,194 a combined 522,434 square feet of space. That’s more than three quarters of the total Total Market 2,615,168 $6,327,593 volume in metropolitan San Francisco over Source: Yardi Matrix. Data as of June 2017 the past 12 months.

Since 2014, transaction volume has been led by 1980s-vintage office properties, $9.6 Transaction Volume billion of which have been sold. Next was circa-2000s properties, which saw $4.5 billion Total Total in sales. Transaction Transaction Top 10 Buyers Square Feet Volume (000s) Beacon Capital Partners’ $475 million Beacon Capital Partners 746,384 $475,400 acquisition of the 746,384-square-foot Forty Four Montgomery office building in Main Place Liberty Group 276,900 $374,000 the Financial District is the largest transac- The Blackstone Group 417,266 $351,458 tion completed in the metro during the American Realty Advisors 291,083 $350,000 past 12 months. Rockpoint Group 402,534 $345,000 Brookfield Properties 488,882 $294,000 Average Price (Per Square Foot) Vanbarton Group 435,290 $277,073 HNA Group 345,595 $255,000 Avg. Price Top 5 Submarkets Per Square Foot RREEF Property Trust 145,000 $175,250 Menlo Park-Palo Alto $1,208.62 Deka Immobilien 189,464 $174,000 South Beach $845.01 Source: Yardi Matrix. Data as of June 2017 Mission Bay $760.86 Financial District $732.63 North Beach $686.19

Source: Yardi Matrix. Data as of June 2017

San Francisco Office Report | Second Quarter 2017 6 San Francisco Submarkets

Area # Submarket Area # Submarket Area # Submarket 1 Financial District 15 San Francisco - Southwest 29 Belmont-San Carlos 2 North Beach 16 San Francisco - Southeast 30 Redwood City 3 Russian Hill 17 Potrero Hill 31 Menlo Park-Palo Alto 4 Marina-Pacific Heights 18 Bayview 32 Mill Valley-Sausalito 5 Presidio 19 Candlestick Point 33 San Rafael 6 Richmond District 20 Colma-Brisbane 34 Lucas Valley-Marinwood 7 Western Addition 21 Daly City 35 Novato 8 Civic Center 22 South San Francisco 36 Petaluma 9 South Beach 23 The East Side 37 Rohnert Park 10 South of Market 24 San Bruno 38 Sebastopol 11 Mission Bay 25 Millbrae - Burlingame 39 Roseland 12 Mission District 26 San Mateo 40 Santa Rosa 13 San Francisco - Central 27 Foster City 41 Fulton 14 Sunset District 28 Redwood Shores 42 Sonoma

San Francisco Office Report | Second Quarter 2017 7 DISCLAIMER

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