World

Thursday 24 July 2014

San Francisco matches Dublin as lack of prime office space drives rents

Dan Levy

Published 17/07/2014|00:00

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Commercial property rents in San Francisco are rocketing as demand out strips supply

Google 's purchase of a San Francisco waterfront property underscores the rising demand for commercial real estate in the city, with office-building sales on pace for their strongest year since the market's peak.

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Google's $65m acquisition brought San Francisco office sales through last week to $3.67bn, up almost fourfold from the same time a year earlier and headed for the highest annual tally since $8.97bn in 2007, according to Real Capital Analytics Blackstone Group this month completed a $588m deal for a 49pc stake in the One Market Plaza complex, the biggest transaction so far in 2013.

As in Dublin, technology companies in San Francisco are fuelling the surge in demand as office vacancy shrinks, even with new projects rising, said Grant Lammersen, a broker at Cushman & Wakefield who represented the sellers in Google's deal. Buyers are seeking to expand holdings in a market where prime rents jumped 9.6pc in the second quarter from a year earlier, more than triple the US average.

"There's seemingly insatiable demand in San Francisco," Ben Carlos Thypin, director of research analysis at New York- based Real Capital, said in a telephone interview.

"Institutional investors are buying the highest-quality properties they can get their hands on."

Google, owner of the world's largest search engine, paid about $738 a square foot for 188 The Embarcadero, a 28-year-old building that hasn't been renovated and is about two-thirds empty, two people with knowledge of the deal said last week.

Blackstone's purchase at One Market Plaza, at $823 a square foot, is the highest since it sold the same property to Morgan Stanley for a record $1,001 a square foot in 2007, according to Real Capital.

It's not clear what Mountain View, California-based Google plans to do with the eight-story Embarcadero property, acquired from Ares Management LP and USAA Real Estate. The building was designed to resemble an ocean liner and is located on the bayside boulevard at Howard Street, within view of the landmark Ferry Building, owned by Blackstone, and about two blocks from the Internet company's main offices in the city.

Google also last week agreed to lease 250,000 square feet (23,200 square meters) at Spear Tower, which at 42 stories is the tallest structure in the One Market complex. The maker of the Android operating system will take floors two through 16, a person with knowledge of the terms said.

"We are excited to expand in San Francisco, and we will continue to work hard to be a good neighbour in the communities where we work and live," Caitlin Adair, a Google spokeswoman, said. She confirmed the purchase and lease transactions but declined to give details.

The Embarcadero building and One Market Plaza were part of a group of properties that Morgan Stanley acquired from Blackstone in a June 2007 deal financed with commercial mortgage-backed securities that marked the previous real estate peak. The fall of Lehman Brothers the following year deepened the US financial crisis and sent real estate values plunging.

AREA Property Partners, since acquired by Ares, took over the Embarcadero office from Morgan Stanley upon the default of a mezzanine loan and brought in USAA as co-owner, according to Real Capital. How much they paid is "not really clear" since it wasn't a standard transaction, Thypin said in an e-mail.

Cassidy Turley/BT Commercial said in a 2010 report that 188 The Embarcadero was valued at $323 a square foot when Morgan Stanley lost control of the building.

The property attracted suitors including pension advisers and high-net-worth individuals from the US, Asia and Europe that viewed vacancies in the building as an opportunity amid San Francisco's social-media and mobile-application boom, Cushman's Lammersen said.

"They didn't have to take the leasing risk and could get in right now," he said.

Leasing from the technology industry has pushed San Francisco office occupancies to an all-time high of almost 71m square feet, according to CBRE Group Rental agreements for 1.4m square feet were signed in the six months through June, exceeding the total for 2013, CBRE data show.

Fierce investor interest, and a reliance on technology companies whose growth projections proved false in the late 1990s Internet boom, may yet lead to a slowdown in demand and rents, said Dan Fasulo, managing director at Real Capital.

"As far as fundamentals go, San Francisco has some of the best, but we're getting close to the point where I'm starting to get nervous," Fasulo said in a phone interview. "It feels like this tech venture has run for a while."

For now, developers are planning to meet the demand with 4.4m square feet of projects, including Boston Properties 's $1.13bn headquarters tower for Salesforce.com that will be the city's tallest building, at 1,070 feet, and high-rises by Kilroy Realty and Tishman Speyer Properties. All are in the south financial district. More than 80pc of the space expected to open in the next 12 months has already been leased, according to CBRE.

"Along with Silicon Valley, San Francisco has become a high-tech innovation capital," said Joe Schoendorf, a partner at venture-capital firm Accel. "I suspect it is the only major city that is out of commercial office space." (Bloomberg)

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