San Francisco Office Market Enjoying Tech Migration from Silicon Valley

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The booming technology industry has been a driving factor for the growth of San Francisco's housing market, and it is now doing the same to the city's office space. 

In the last quarter of 2013, several deals larger than 50,000 square feet were signed, including Esurance and Cengage Learning. 

Total net absorption during the fourth quarter was 582,771 square feet, the greatest amount since the second quarter of 2012, according to a report from Jones Lang LaSalle. 

The total net absorption for 2013 was 1,399,651 square feet, marking the third year in a row that San Francisco recorded more than one million square feet of net absorption. 

"[This growth] is something that we hadn't seen even during the dot-com boom," Julia Georgules,  JLL's research director in San Francisco, told WPC News. "All of that growth is organic, people are actually growing and expanding and hiring more people and needing more office space."

One reason for the office market growth is companies from Silicon Valley are increasingly entering San Francisco as they realize tech workers rather live there and work there, instead of commuting to the Valley. 

"We've become kind of a new-age headquarter city," said Chris Roeder, JLL's managing director in San Francisco. "Whereas in the 80s and 90s it was banks, insurance companies and professional service firms that were headquartered here, today it's the epicenter of creativity and new age headquarter for companies like SalesForce, Twitter, DropBox, Uber, Square and many others." 

The booming tech industry is transforming cities across the U.S. including New York City, where companies are increasingly setting up regional headquarters. 

Along with access to talent, companies in San Francisco benefit from a payroll tax free zone in the mid-market, which was created to keep Twitter in the city. This in turn has created a submarket full of tech companies. 

A report from Cushman & Wakefield also showed high leasing activity for San Francisco, with two million square feet during the fourth quarter. 

The technology market remains strong, Maria Sicola, executive managing director and head of Americas research for Cushman & Wakefield, said in the report. "We are seeing tenants that want to migrate into the Central Business Districts. That's mostly a core market phenomenon in places like Boston and San Francisco." 

Total vacancy in San Francisco dropped slightly to 11.1 percent in the fourth quarter, but it's likely to head lower as companies shop the market for space. 

In the first weeks of 2014 alone, the city has witnessed several large tech leases including Twitter's expansion to a total of more than 700,000 square feet of office space; EventBrite leased 95,000 square feet; 90,000 square feet for Xoom and Intuit's take-up of 200,000 square feet. Practice Fusion, a web-based electronic health records company, leased 101,000 square feet. 

Citywide average asking rents increased by 1.4 percent from the third quarter to reach $56.88, up 10.3 percent from the previous year. Since 2010, rents have increased by a whopping 70 percent, JLL reports. 

Going forward, rents are expected to spike as office supply shrinks, and increase by about 10 to 15 percent in 2014. 

"There's only 16 blocks of space with over 60,000 square feet available over the next two years," JLL's Mr. Roeder said. "Half of them are probably under negotiations."

Those tech companies in the market include: Dropbox, which is looking for at least 330,000 square feet and Trulia, looking to lease 80,000 to 100,000 square feet. Other tech household names in the market include LinkedIn and Pinterest. 

"Competition for space is the topic [of conversation] here," Ms. Georgules said. As long as tech companies continue growing, it will likely remain the topic in San Francisco.