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Business Times by J.K. Dineen,

San Francisco cued for even higher office rents

Vacancies have reached the single digits in many of San Francisco’s subdistricts. Top downtown buildings are fetching up to $800 a square foot, more than replacement costs. Rents have now exceeded highs last seen in 2007, climbing 48 percent in 24 months. And the city logged 1.4 million square feet of positive absorption in 2012 after hitting a near all-time high of 2.1 million square feet in 2011.

Is there any way that San Francisco can continue to climb at such a dramatic clip in 2013? Or are we ready for the next big crash?

For the time being anyway, the answer to both questions is probably no.

Most downtown analysts expect rents to continue to trend upward, but at a much slower rate than in the past two years. After $6.1 billion worth of downtown real estate changed hands in 2012, it’s likely that sales velocity will slow down as well. Tony Natsis, a partner with Allen Matkins, said he doesn’t expect prices to keep escalating; nor does he expect them to fall. “How far do you go past replacement cost before you look like an imbecile?” said Natsis. “I think you have hit the peak, but it’s still a great price to sell at if you’re going to be a seller.”

But while the markets likely will level off, strong tech demand and foreign appetite will continue to make San Francisco the No. 2 U.S. investment target behind New York City. (San Francisco actually had bigger rent increases than New York in 2012.)

Colin Yasukochi, research director for CBRE, expects 1 million square feet of new tenant demand this year in the city. How much of it will be tech-related? Probably the vast majority. In 2012, technology companies accounted for 65 percent of all leasing activity, compared with 35 percent in 2011, according to the CAC Group. Some big non-tech tenants such as Bank of America are now in the market, something that should increase in the next 12 months because a lot of law firms and financial groups have leases that expire in 2016 and 2017. But many traditional law firms and insurance companies are shrinking, not growing. So it’s a good bet that tech will still represent more than 50 percent of activity next year, with Google and Salesforce both likely to do deals over 300,000 square feet. For every Google and Salesforce, there are three tech companies springing up out of nowhere. Jones Lang LaSalle Research Manager Julia Georgules points out that the latest wave of technology tenants — companies such as Obvious, Mareki, Uber and SquareTrade — are virtually unknown one day and leasing 50,000 or 75,000 square feet the next.