Better times may be ahead for The City’s office market 

San Francisco’s office market is buoyed today by two  phenomena: continued growth in the technology sector, and growing general optimism throughout the business community.

The City continues to experience significant private-sector job growth, thanks to hiring by technology companies. It is not surprising those accounts for much of The City’s recent office leasing, by companies such as  Aliph, Booyah, DropBox, Google, IGT,  Modcloth, Riverbed, Snapfish, Twitter, Yelp and Zygna, among others. The city where the fortune cookie, cable car, slot machine and television were all invented continues to be a hub of innovation and creativity. San Francisco is a magnet for smart, creative people, and consequently, the companies that want to hire them.

The office market — and hopefully the economy — switched from negative to positive the middle of last year. Occupancy was still declining through the first half of 2010.  Then, in the third quarter of last year, occupancy started growing again for the first time since 2007, and grew by a robust 310,000 square feet.  The big surprise was 2010’s fourth quarter, when occupancy increased by an astonishing additional 668,000 square feet.

That increase in occupancy in the second half of the year drove the office vacancy rate down a full point, from 15.5 percent at the start of 2010, to 14.5 percent at year-end. And office leasing is off to a strong start so far in 2011.

In addition to the long-awaited resumption of growth and all the recent leasing activity, some people feel more optimistic for other reasons: The Giants won the World Series; there is a new Board of Supervisors that appears to appreciate the importance of job creation and retention; the old bus terminal and its ugly overhead ramps have been torn down to make way for construction of the exciting new Transbay Transit Center; and San Francisco was selected to host the next America’s Cup. A spirit of renewed optimism is infiltrating and impacting the commercial marketplace.

Following 2½ years of gloom, doom, and a wretched economy that caused 3.5 million square feet of office space to be vacated in San Francisco, tenants are cautiously optimistic and landlords are downright bullish. In fact, if there is a black cloud to all this silver lining — at least from the tenant’s perspective — and I only represent office tenants — it is that landlords have already started raising rents. Conditions are still tenant-favorable, but landlords will hike rents as fast as they think they can get away with. Therefore, my recommendation is to evaluate your current office lease as soon as commercially possible and to strike a new transaction as early as you can, while good deals are still available.
 
Frank Fudem is a senior vice president and partner with Cassidy Turley BT Commercial. He has represented corporate tenants in office space transactions for over 25 years. Contact him at ffudem@ctbt.com.

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