Another San Francisco Office Boom?

Equity Office recently announced that it would begin construction on a new 10-story office building at Foundry Square to house Barclay Bank. Foundry Square, located at Howard and First streets, was created during the dot-com boom days. Sun Microsystems took one of the four corners, though it never occupied the building because the market turned soft. Two of the four corners were finished prior to the crash; the other two corners remain empty parking lots awaiting development. Now with vacancy rates expected to revert to single digits, developers are jumping on the bandwagon of developing office space in San Francisco for the first time since 2000.

Historically, office development has been triggered when the overall vacancy falls below 9%. Today the vacancy rate is 12.9% and dropping. Based on the fact that at least two years are needed to get a project up and running, where will more space come from? The only real option is new development.

Judging by the projects that are planned or being considered, San Francisco will be adding 7.5% new office space during the next couple of years. For example, Tishman Speyer has gone back and forth on its Mission Street project. It originally planned to build a first-class office building; then it considered making the space a residential condo building; now it is looking again at developing an office building.

The best news is that tenants will ultimately be the winners in this shift. New office buildings will be looking for tenants. In the absence of large tenants that might move into the city from other markets—San Francisco has not been viewed as a financial capital since the 1980s—where will these tenants come from? They will come from the city’s existing tenant base, as they leave older building for new buildings.

This is music to the ears of real estate brokers and tenants alike. Landlords will reward brokers who represent tenants, and tenants will enjoy more enticements to lease both old and new space.