San Francisco's tech industry rush has translated into a golden commercial real estate industry with high office rents and big sale prices, but now there are concerns about where the nation's hottest market is headed.
During a 10-month period from July 2012 to April, 48 properties valued at $20 million or more exchanged hands â€” illustrating the strength of the market and how San Francisco ended up with higher-than-expected property-sales taxes.
The sale prices of those properties totaled more than $4.5 billion, with 15 fetching more than $100 million and the 48-story tower at 101 California St. going for $910 million.
"San Francisco has recently been the healthiest office market in the U.S. thanks to the tech boom, and that health has attracted significant investor demand, including overseas capital," said Jed Reagan, an analyst with the Newport Beach-based commercial real estate consulting firm Green Street Advisors.
This level of activity has not been seen since fiscal year 2006-07, right before the Great Recession set in.
As real estate costs remain high â€” Reagan said in some cases San Francisco office prices now exceed the cost of building new properties â€” there are worries about market sustainability.
"There's significant concern about there being a bubble in the office market," said Santino DeRose, a real estate broker and founder of the San Francisco-based DeRose and Appelbaum firm. "I am not sure there is one, as we are still seeing steady growth in office rents coupled with limited supply."
Reagan said the market has slowed but remains healthy.
"The pace of investment sales has cooled a bit this year as interest rates have ticked up and San Francisco office fundamentals have moderated somewhat," he said. "Fundamentals remain healthy, however, and San Francisco is still a highly sought-after market for global investors."
The largest transaction in the 10-month period was for 101 California St., acquired by a Singaporean sovereign wealth fund, but it did not set a record. That honor goes to the early 2006 sale of the Bank of America Center at 555 California St., which went for $1.1 billion to a Donald Trump partnership.
The sale of 333 Market St., a 33-story office tower in the Financial District, exhibited how quickly a property can soar in value. It sold for $395.3 million to the Atlanta-based Wells Real Estate Investment Trust II in December. The same building sold for $333 million in 2010.
Dolby Laboratories moved to the mid-Market Street tech hub near Twitter with the $109.8 million purchase of 1275 Market St. Neighbors include other tech companies such as Zendesk, Zoosk, One Kings Lane and CallSocket.
The transactions also put more money into city coffers. With final numbers still pending for the fiscal year that ended June 30, the property transfer tax is projected at $245.9 million, up from the previous two fiscal years of $233.6 million and $135.2 million, respectively. San Francisco has budgeted $225.12 million for the current fiscal year.
Like all economic booms, a bust is always on the horizon. San Francisco is projecting a downturn in two years, according to its five-year financial report.
Reagan disagrees with that analysis. "While The City may not maintain its torrid economic growth pace of the past few years, a reduction in employment in the next several years appears unlikely," he said. "The tech sector's strength seems more sustainable this time."
by Joshua Sabatini