MARKETBEAT San Francisco Office Q2 2019 SAN FRANCISCO OFFICE Rents Soar on Sky High Demand Economic Indicators* The San Francisco metropolitan division (San Francisco and San Mateo counties) closed May with an unemployment rate of just 12-Month Q2 18 Q2 19 1.8% (the lowest level recorded since at least 1990), down from a Forecast revised 2.0% in April and below the year ago figure of 2.0%. Office San Francisco Metro Employment 1.14M 1.18M using positions grew by 5.4% year-over-year (YOY). Total private sector jobs increased by 4.3% to 1,049,000. San Francisco Metro Unemployment 2.0% 1.8% U.S. Unemployment 3.9% 3.6% The first major project has reached the entitlement stage in *2019 Q2 data are based on latest available data Central Soma. San Francisco City Planning approved the first Source: BLS, Moody’s Analytics, C&W Research phase of Tishman Speyer’s 598 Brannan Street which will include 700,000 square feet (sf) of office space. Rents soared, especially within the CBD. The Citywide overall Market Indicators (Overall, All Classes) asking rent closed at a record $79.07 per square foot (psf), up 12-Month 9.4% YOY. The CBD Class A direct asking rent was a record Q2 18 Q2 19 Forecast $86.12 psf, up 9.8% YOY. The South Financial District has recorded a big spike in Class A direct rents over the past year, Overall Vacancy 7.4% 5.5% increasing 17.9% to $90.02. Net Absorption (sf) 1.4M 86k Under Construction (sf) 3.4M 2.4M Vacancy was the lowest in this economic cycle. The Citywide overall figure was just 5.5% at the end of the second quarter, Average Asking Rent* $72.30 $79.07 falling 30 basis points (bps) from the first quarter and down 190 *Rental rates reflect full service asking $psf/year bps from one year ago. Citywide new leasing totaled 1.7 million square feet (msf); down Overall Net Absorption/Overall Asking Rent from a revised 2.5 msf in the first quarter. A scarcity of large 4-QTR TRAILING AVERAGE blocks made it more challenging for tenants looking for 100,000 1,400 $90 sf or more. 1,200 1,000 $80 The demand for space remained robust. There was a 800 noticeable jump in active tenant requirements in the second $70 600 quarter. The total being searched for was up by 3.3 msf over 400 the quarter and 3.8 msf over the year ago figure to 9.9 msf. The $60 200 number of large block requirements greater than 50,000 sf 0 $50 climbed 36% YOY and far outpaces supply. There are currently -200 23 tenant requirements of 100,000 sf or more. -400 $40 2014 2015 2016 2017 2018 2019 Construction & Development Net Absorption, SF (thousands) Asking Rent, $ PSF Just under 2.5 msf was under construction at the end of the second Overall Vacancy quarter, all scheduled to deliver between the fourth quarter 2019 10% and 2023. All projects delivering in the next 24 months have pre- leased. As of the end of the second quarter there was only one 9% major development under construction with available space 8% (1,050,000 sf at Oceanwide Center in the South Financial District). 7% The Central SoMa District has finally become more active with the 6% Historical Average: 7.3% approval of 598 Brannan Street (700,000 sf) and the first quarter 5% lease at 88 Bluxome Street to Pinterest (480,000 sf) although 4% pending lawsuits have created uncertainty as to when projects will 3% be able to move forward. 2% 1% 0% 2014 2015 2016 2017 2018 2019 cushmanwakefield.com | 1 MARKETBEAT San Francisco Office Q2 2019 Leasing Activity & Absorption Average Asking Rate by Submarket (Full Service) SOUTH FINANCIAL DISTRICT NEARS $90 PSF New leasing totaled 1.7 msf in the second quarter. There were $110 $106.24 four new leases signed for more than 100,000 sf, three to tech $100 $88.10 firms and one to a financial services firm. Building owner $90 $81.59 Paramount Group leased over 400,000 sf among three large $80 $78.12 $77.62 users at One Front Street and 50 Beale Street. First Republic $72.36 $72.06 $70.04 $70 $64.05 Bank’s blockbuster lease of 195,000 sf at One Front Street $60 $55.46 expanded its headquarters footprint to nearly 800,000 sf. There $50 were two large block leases signed at 50 Beale Street; Autodesk $40 currently at One Market Street and Glassdoor relocating its $30 headquarters. $20 $10 $0 South North Mid-Market North Union SOMA Jackson Showplace Van Ness The The South Financial District has recorded a big Financial Waterfront Financial Square Square Square / Corridor Presidio spike in Class A direct rents over the past year, Potrero Hill increasing 17.9% to $90.02. Availabilities by Size Segment DECREASING SUPPLY ACROSS ALL SIZE SEGMENTS Investment Activity San Francisco investment activity in the first two quarters closed 5 at $1.29 billion and $1.43 billion, respectively; well ahead of 27 2018’s full year total of $2.53 billion. Six transactions closed citywide with an average price of $921 psf and 1.5 million sf of 97 0-10K building area. The top transactions of the second quarter by price 423 10-25K per square foot were 650 Townsend Street with Beacon Capital Listings 25-50K Partners closing on Zynga’s headquarters for $893 psf while 50K+ JUUL sought to expand its headquarters by acquiring 123 Mission 296 Street for approximately $1,149 psf. Strong leasing fundamentals and buyer demand are expected to continue through 2019 and a number of pending transactions are expected to close above $1,000 psf. Average Asking Rate by Class (Full Service) GAP BETWEEN CLASS A AND B OFFICE BUILDINGS IS $12.03 PSF Outlook $90 Potential for further pre-leasing at proposed sites including 5M, Mission Rock, and Pier 70 along with other Central SoMa $80 developments. $70 Additional rent increases, particularly for prime Class A space. $60 The IPO onslaught will continue with more San Francisco- based companies to go public through the rest of the year. $50 $40 2014 2015 2016 2017 2018 2019 Class A Class B cushmanwakefield.com | 2 MARKETBEAT San Francisco Office Q2 2019 YTD OVERALL **YTD OVERALL OVERALL SUBLET DIRECT OVERALL CURRENT QTR INVENTORY NET LEASING UNDER CNSTC AVERAGE ASKING AVERAGE SUBMARKET VACANT VACANT VACANCY OVERALL NET (SF) ABSORPTION ACTIVITY (SF) RENT ASKING RENT (SF) (SF) RATE ABSORPTION (SF) (SF) (SF) (ALL CLASSES)* (CLASS A)* North Financial District 26,517,916 356,963 1,645,234 7.6% 12,335 61,798 1,169,781 0 $77.62 $82.17 South Financial District 28,229,252 293,150 1,387,028 6.0% 137,976 935,994 1,769,972 1,320,000 $88.10 $88.66 CBD 54,747,168 650,113 3,032,262 6.7% 150,311 997,792 2,939,753 1,320,000 $81.25 $84.68 Jackson Square 1,490,806 0 16,019 1.1% 45,286 66,197 18,856 0 $70.04 $60.00 North Waterfront 3,238,808 17,586 66,105 2.6% 71,959 106,649 36,750 0 $81.59 $73.68 SOMA 8,211,439 52,541 89,278 1.7% -34,715 63,281 770,927 0 $72.06 $83.98 The Presidio 1,030,627 0 17,980 1.7% 0 -17,980 0 0 $106.24 $106.24 Union Square 3,173,989 29,133 166,816 6.2% -30,498 33,644 88,445 0 $72.36 $76.11 Van Ness Corridor 833,356 10,865 72,919 10.1% -13,866 -17,055 0 0 $55.46 $54.40 Showplace Square / 3,976,623 0 19,711 0.5% -2,850 51,563 156,911 85,333 $64.05 N/A Potrero Hill Mission Bay 1,771,735 0 0 0.0% 0 0 0 1,023,000 N/A N/A Mid-Market 4,367,051 111,409 244,352 8.1% -99,342 -171,575 102,126 0 $78.12 $77.61 Third Street Corridor 349,465 0 0 0.0% 0 0 38,000 0 N/A N/A TOTAL 83,191,067 871,647 3,725,442 5.5% 86,285 1,112,516 4,151,768 2,428,333 $79.07 $82.97 *Rental rates reflect full service asking $psf/year ** Does not include renewals OFFICE CLASS BREAKDOWN Class A 59,558,009 702,599 2,791,378 5.9% -15,241 720,384 3,434,133 2,428,333 $82.97 Class B 16,183,496 106,697 751,759 5.3% 137,010 377,719 588,193 0 $70.94 Class C 7,449,562 62,351 182,305 3.3% -35,484 14,413 129,442 0 $70.77 Key Lease Transactions Q2 2019 PROPERTY SF TENANT LANDLORD TRANSACTION TYPE SUBMARKET One Front Street 195,000 First Republic Bank Paramount Group New Lease North Financial 303 Second Street 131,000 Playstation Norges Bank / Kilroy Realty New Lease South Financial 50 Beale Street 117,000 Autodesk Paramount Group New Lease South Financial 50 Beale Street 116,000 Glassdoor Paramount Group New Lease South Financial 1 De Haro Street 86,000 Samsara SKS Partners New Lease Showplace Square 160 Spear Street 74,000 Workday Tishman Speyer Renewal / Expansion South Financial 555 Mission Street 67,000 DLA Piper Union Investment Real Estate GmbH Renewal South Financial Key Sale Transactions Q2 2019 PROPERTY SF BUYER SELLER PRICE / $PSF SUBMARKET 650 Townsend Street 672,000 Beacon Capital Partners Zynga $600,000,000 / $893 Showplace Square 123 Mission Street 346,000 JUUL Northwood Investors $397,000,000 / $1,147 South Financial 655 Montgomery Street 273,000 Beacon Capital Partners Blackcreek Diversified Property Fund $191,500,000 / $701 North Financial 255 California Street 170,000 Rockpoint Group Prudential Real Estate Investors $157,000,000 / $924 North Financial 808 Brannan Street 61,000 The Sobrato Organization JMB Financial Advisors $60,000,000 / $984 Showplace Square cushmanwakefield.com | 3 MARKETBEAT San Francisco Office Q2 2019 Office Submarkets San Francisco Cushman & Wakefield For more information, contact: About Cushman & Wakefield 425 Market Street, Suite 2300 Derek Daniels Cushman & Wakefield (NYSE: CWK) is a leading global real estate services firm that delivers exceptional value for San Francisco, CA 94105 Associate Director, Research real estate occupiers and owners.