3rd Quarter Vacancy Rates at a Standstill

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San Francisco continues to enjoy strong office market fundamentals in the 3rd quarter. Net absorption equaled supply growth at more 1 million sq ft. The market vacancy rate was nearly unchanged, with just a small uptick to 6.2%.

Supply in the 3rd quarter was bolstered by The Exchange, a 750,000-square-foot campus of interconnected buildings, located along Interstate 280. This Mission Bay project was developed by Kilroy Realty, and was pre-leased by Dropbox, fueled by expansion plans and space for future growth. Dropbox plans to sublease unused space, which is a strategy being employed by numerous other tech companies, such as Uber, Micron Technology and Splunk. Given the extremely tight real estate market, many are choosing to lease large tracts of space on long-term leases, so that they have room for future growth needs, while sub-leasing unused space to augment revenue until those expansions happen. Dropbox is planning to sub-lease approximately 100,000 sq ft at The Exchange.

Graph courtesy of CoStar

San Mateo’s Bay Meadows Station 2, also completed in the 3rd quarter, added 189,000 sq ft that was pre-leased by Guidewire Software in 2018. The transit-oriented space, adjacent to Caltrain, has been in high demand by tech giants. Guidewire’s stake comprises 3 of the 5 buildings in the development.

Franklin Templeton campus expansion is also now complete in San Mateo, with the addition of two new buildings, each with 121,000 sf ft over four stories. Franklin Templeton’s expanded headquarters now encompasses a footprint of over 800,000 sq ft.

Without the addition of these new projects that completed in the 3rd quarter, net absorption would have been negative. For instance, Guidewire vacated over 200,000 sq ft in Redwood city to facilitate the headquarter’s move to newer, larger digs, which is a trend for tech firms. New, premier office space is in high demand, while slightly older properties have fallen out of fashion. The features and amenities offered by the newly constructed, mixed-use, transit- and community-oriented spaces are important in attracting the constant supply of fresh talent needed by the tech firms.

Let my team at Keystone Realtors® meet all your real estate needs. We can help you find the perfect investment property to get started, and provide advice on your investing journey. Paul Phangureh has over 16 years of experience in buying and selling in the Santa Clara and San Mateo County areas, specializing in the high-end, luxury market, as well as commercial and multi-use real estate. We can help you navigate the process of getting started with real estate investment. Visit our website at Keystonesv.com for listings and information. You can contact Paul at 650-924-2544, or email at [email protected].