The San Francisco Business Times
By J.K. Dineen
December 18th, 2009

San Francisco office tenants are increasingly gravitating to downtown’s most prestigious trophy towers, taking advantage of desperate landlords to lock in cheap rents, according to a study by Jones Lang LaSalle.

While overall San Francisco tenants gave up 1.3 million square feet more than they leased in 2009, the city’s 49 most prominent buildings — JLL calls them the Skyline 49 — actually had about 100,000 square feet of positive absorption over the past two quarters.

“The trophy buildings have a lot less vacancy for their prime spaces, and the majority of the vacancy is in mid- to lower floors,” said Jones Lang LaSalle Research Director Colin Yasukochi.

Recent “flight-to-quality” deals include three tenants who signed leases in Tishman Speyer’s new 555 Mission St.: AT Kearny, which moved from 255 California St. Silicon Valley Bank, which moved from 185 Berry St.; and Novak Druce Quigg, which sublet the building’s penthouse from Sequoia Capital and is moving from 525 Market St.

Meanwhile, Medivation recently signed a 63,000-square-foot deal at the desirable Hills Plaza, moving from 201 Spear St., and Exigen relocated from 505 Montgomery St. to 345 California St. Del Monte will move from the Landmark at One Market to One Maritime Plaza, a 50,000-square-foot expansion that includes the top two floors of that building. Robert W. Baird & Co. is shifting from a small suite at 101 California St. to 14,000 square feet near the top of the BofA building at 555 California St.

“It’s your typical upgrading when the market conditions are favorable and rents are attractive,” said Yasukochi.

The top buildings are logging big blue-chip law firm renewals as well. In the fourth quarter, One Market Place signed three large renewals: Morgan Lewis for 150,000 square feet, Wilson Sonsini Goodrich & Rosati for 38,000 square feet and Duane Morris for 50,000 square feet.  Ropes & Gray, while remaining in the Embarcadero Center, is nearly doubling in size, from 29,000 square feet to 50,000 square feet.

Rents declined 30 percent across the entire market, and the space that has held up the best is the lower floors in the highest-quality buildings, according to Yasukochi. For this group, leasing rates dropped 22 percent, compared with 27 percent for the top floors.

Meanwhile, the flood of sublease space coming onto the market seems to have abated for now — peaking at about 2.5 million square feet. That is less than half of the 7 million square feet that hit the market after the dot-com crash, according to Yasukochi. During the dot-com collapse, San Francisco lost 63,000 office jobs. This time, 10,000 office jobs have been lost, although even at the height of the latest bubble — March of 2008 — San Francisco had 40,000 fewer office jobs than it did in March of 2001.

“The last time it was two to three times worse, and that is the story going forward — there is two to three times less recovery that is needed,” said Yasukochi. “It’s just a matter of what is going to drive the recovery and where those jobs are going to come from. And the answer is the usual suspects — tech, biotech, and this time health care as well.”

Many of the downtown subleases are being filled by tech companies. While tech companies prefer SoMa and open loft-style floor plans, when push comes to shove they are settling for ultra-affordable but less-than-stylish financial district subleases.

“It appeals to them because tech companies have traditionally been looking for shorter-term deals and good prices, and that is exactly what you are getting in the sublease space today,” said Yasukochi. “What is filling the bill for them is downtown buildings that are attractively priced and shorter leases.”

NAI BT Commercial broker Frank Fudem, who represented Sequoia Capital in the sublease deal at 555 Mission St., said, “It was an amazing opportunity and they got a fantastic deal. But this was not the year for most companies to appear opulent — this was a year a lot of companies wanted to look frugal.”

—————————————————————-

Please contact me if there is anything I can do to help you as a
Tenant Representative in the commercial real estate world.  Visit my
LinkedIn profile for recommendations.

Tom Poser, Jones Lang LaSalle, San Francisco
www.sanfranciscotenantrep.com

Comments are closed.