Strong demand for the hip offices favored by tech firms and creative types will reward The City and the Peninsula with the country’s largest growth in office rents this year, according to a new report.
A report by the global real estate broker CB Richard Ellis said the cost of local office space could increase by up to 7 percent by year’s end.
Senior Vice President Meade Boutwell said after two years of declining rents colored by The City’s high unemployment and office-vacancy rate, more tech firms are starting up or relocating here.
“Our rent’s been at the bottom, so it’s much easier to go up when you’re at bottom,” Boutwell said. “They’re very bullish on San Francisco.”
At the end of 2010, the region had an office vacancy rate of 13.7 percent, which is expected to decline to 11.8 percent by the end of this year. The New York region — where office rents are expected to rise 6.6 percent in 2011, earning it second place on the company’s list — started 2011 with an 8.4 percent vacancy rate, which could decline to 7.2 percent.
Jay Sternberg, a senior vice president for the global brokerage firm Colliers International, said rents in the area are climbing even as vacancies remain high because of the demand for alternatives to “high-rise, vanilla office space.”
Sternberg said most local “creative space” is found in the South of Market neighborhood where offices feature exposed bricks, beams and warehouses. Such offices are more common throughout New York, he said.
“That’s the hottest part of the market,” Sternberg said. “It has access to the Peninsula, it’s creative and it’s different.”
In recent years, Sternberg and Boutwell said, tech employment in San Francisco has grown faster than traditional office jobs.
“But those tech companies will need attorneys and accountants,” he said, suggesting that Financial District office space could soon make a comeback.
In the meantime, the managers of large office buildings that opened their doors in recent years still have many vacancies and are ready for a positive push.
“We have 11 stories in here right now, and we have the fifth and ninth floors occupied and all the others are vacant,” said Simon Tsui of 1 Kearny, which opened in spring 2009 amid the recession. “It’s been sitting there for a year. We’re hoping to strike more leases.”
Expected rent growth and vacancy rates in San Francisco and the Peninsula:
Expected 2011 rent growth: 7 percent
Prices at the start of 2011: $31.33 per square foot per year
Vacancy rates at the start of 2011: 13.7 percent
Expected vacancy rates at the end of 2011: 11.8 percent
Source: CB Richard Ellis