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San Francisco Office Rents Seen Topping Manhattan in 2015

August 14, 2014

San Francisco Office Rents Seen Topping Manhattan as Tech Surges

The skyline of San Francisco behind the Bay Bridge. Photographer: Ken James/Bloomberg

San Francisco is poised to surpass Manhattan as the most expensive U.S. office market next year as technology companies extend a surge in leasing, according to CBRE Group Inc. (CBG:US), the largest commercial real estate brokerage.

Office costs in San Francisco are soaring at the fastest rate in the country, CBRE said in a report this week on the effects of the technology industry on commercial property. The firm estimates that average rents in the West Coast city will rank as the priciest by the end of 2015 -- the first time it would exceed New York since the dot-com bubble in 2000.

Technology companies have dominated U.S. corporate leasing since the last recession ended in 2009, accounting for one out of four U.S. office-using jobs, CBRE said. In San Francisco, the industry’s hub, almost three-quarters of tenant deals this year through June were signed by tech firms as social media, data-storage and mobile-application startups expand.

“We expect tech’s growth potential to remain strong for the next two years and lead expansion in concentrated areas throughout the country,” Colin Yasukochi, CBRE’s research and analytics director in San Francisco, said in a phone interview.

San Francisco office rents will climb to $69.71 a square foot by the end of next year, up almost 18 percent from $59.28 in the second quarter, Yasukochi said. Manhattan rents will grow at about a third of that rate, rising 6.5 percent to $69.68.

Banks Lag

Leasing demand in New York from financial firms, the traditional core, has lagged technology, media, advertising and information companies, which accounted for 41 percent of new office jobs from 2011 to 2013, CBRE said. In San Francisco, hiring at companies such as Salesforce.com Inc. and Twitter Inc. helped tech represent 56 percent of new jobs, CBRE said.

San Francisco’s economy is also benefiting from growth at health-care and education companies and restaurants as well as in tourism and construction, said Ben Rosenfield, the city’s controller.

“Even industries that have been flat such as manufacturing are hiring,” he said in an Aug. 4 interview.

The last time San Francisco’s office market saw such growth was during the boom in Internet stocks that peaked in 2000. The city led all U.S. markets starting in 1999, with average rents soaring 79 percent in a year to $73.64 in 2000, before rates crashed to $31.04 at the end of 2001, CBRE data show.

This time is probably different, the company said.

“At the heart of high-tech’s growth is strong demand for products and services from consumers,” Los Angeles-based CBRE said in its report. “As long as high-tech companies align themselves with this demand, the unrealistic growth and valuation expectations that defined the dot-com bubble should be avoided.”

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net

To contact the editors responsible for this story: Kara Wetzel at kwetzel@bloomberg.net Daniel Taub


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