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SF OFF 2Q10 Unsecured

SF OFF 2Q10 Unsecured

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Published by Justin Bedecarre

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Published by: Justin Bedecarre on Aug 02, 2010
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 The Manhattan office market continued to tighten during the first half of 2007, extending strengths exhibited during the second half of 2006. Steady employment growth contributedto positive absorption of available space and rapidly escalating asking rents. The New York City economy expanded at a healthy pace during the first six months of theyear, led by strong gains in office-using employment. Data available through the end of May show that the City has added nearly 16,800 jobs in industries that are key to the commercialoffice market, with financial services and professional business services adding 7,400 and5,500 jobs, respectively. This resulted in increased demand for office space in a market that was already the tightest it had been since the first quarter of 2001. The year began with 26.1 million square feet) available throughout Manhattan. By the endof June, available space had fallen precipitously to 20.8 a decline of 20.5%. Thisdiminishing availability of space has been the story of the market; April 2007 was the only month in the past year that did not record a month-to-month decline of at least 122,000square. As a result, Manhattan’s overall vacancy rate has tumbled to a six-year low, closing the mid-year at 5.3%. For the third consecutive quarter, the vacancy rate closed below equilibrium, defined as a vacancy rate range of 7.0% - 9.0%.
In this environment, it is no surprise that asking rates have skyrocketed. Up 36.2% from ayear ago, Manhattan’s overall total average asking rent closed the first half of 2007 atanother record-high: $59.17 per square foot. Thus far this year, rents have increased by anaverage of $1.44 each month since January, breaking the old record set back during thesecond and third quarters of 2000. The rapid pace of rental rate growth has extendedthroughout Manhattan. In every submarket but one, overall rents have registered double-digit percentage increases from a year ago. Chelsea, up 4.2%, was the only exception.On a cautionary note, however, leasing activity throughout Manhattan was slower during the first two quarters, partially attributable to both significantly higher rents and lack of available space. With 11.8 leased year-to-date, 2007 activity trails last year’s total through June by 5.4%, with Midtown trailing by nearly 20.0%. This suggests that tenants arepossibly beginning to search for lower-priced space in response to landlords hiking up rentsthroughout the market.
 This year’s leasing has been dominated by Manhattan’s leading industries. Financialservices firms (36.4%) and legal services firms (11.7%) accounted for nearly one of every two square feet leased from January through June. In April, Lehman Brothers Holdings,Inc. signed Manhattan’s largest new lease in 2007, a 414,575-sf sublease at 1271 Avenue of the Americas. The frequency of transactions with taking rents starting at or above $125.00continued to climb: 18 such transactions year-to-date versus 21 signed in the four previousyears combined.
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“Tenant activity is up, with noticeably lesscaution than we’ve seen over the last 18months. Tech companies are increasinglylooking for short term space, while tenantswith longer term visibility see it as a great timeto lock in favorable rates. With amplecommodity space propping up the vacancyrate, landlords are keeping pricing stable inorder to attract this demand.” –Bob Kraynak, Senior Director
National 2009 2010F 2011F
GDP Growth -2.4% 3.1% 3.9%CPI Growth -0.3% 1.8% 2.1%
Unemployment 8.7% 9.7% 8.7%EmploymentGrowth-5.4% -2.2% 1.3%
Source: Moody’s | Economy.com
New deal activitywill grow in the 3,000 to 10,000-sf rangewhile larger tenants look to renew to takeadvantage of low rental rates.
Zynga andDolby are in the market with largerequirements that, together, could leaseup to 480,000 sf in the South of Marketand Mission Bay submarkets.
in the CBDwill stay competitive due to current andupcoming big-block direct and subleaseavailabilities.
Confidence remains positive as many business leaders see growth and hiring in their future.Until hiring happens, the San Francisco office market will see minimal growth. Theunemployment rate for June was 9.7% and is projected to stay flat for the remainder of 2010. This is positive news as the number of job losses may remain in check causing stability toreturn to the market. Although occupancy continues to fall in San Francisco, there has been arecent uptick in tenant demand. The technology and creative-use tenant sectors looking foroffice space in the market continue to grow.
 The technology sector continues to improve as technology-based tenants represent a growing portion of active tenants. New deal activity is driven by new tech requirements and many seetechnology as the leading force behind San Francisco recovery. Landlords are starting to pushrents up in top-tier properties but recent signed leases fail to support such movement. Thedrive to push rents comes from limited view space availability, the perception of improvementtaking place in the market and that tenants perceive these spaces as being undervalued.Conversely, the majority of space in the Central Business District (CBD) is low-rise, limited view, commodity space where asking rents remain flat as demand has yet to force rent growth.Sale activity, led by foreign investment, sprang to life during second quarter. Kilroy Realty Corporation purchased 303 Second Street. This acquisition represents Kilroy’s new growthinto Northern California. 351 California Street sold at auction during the quarter. As the lonebidder, Polidev International purchased the building and is also looking to acquire other Bay  Area properties. 333 Market Street, with Wells Fargo as its largest tenant, also sold during thequarter to a Korean investment group that includes the Korean Teachers' Credit Union. 255California Street is currently under contract to Highridge Partners and two of the threebuildings of the former California State Automobile Association campus, 150 Van Ness and150 Hayes, are on the block for sale.Deal activity grew as Blue Shield renewed three floors at 225 Bush Street totaling 75,432square feet (sf) and law firm Morrison & Foerster signed a 220,000-sf renewal for 17 years at425 Market Street. Morrison, like many large tenants opting to renew early, took advantage of favorable market conditions and locked them in long-term. This renewal is also the largestdeal this year based on total value. The IRS leased 72,738 sf at 100 First Street and Salesforcecontinues to grow making it one of the fastest growing companies in San Francisco. Deloitte& Touche is closing in on a deal for 180,000 sf at Tishman Speyer’s 555 Mission Street, adownsize from the 285,000 sf they have at 50 Fremont Street. This deal, though positive forDeloitte and Tishman, will negatively impact the market as it represents a drop in occupancy.
Office space vacancy in San Francisco will remain high as long as the labor market stays flat.Despite weakened job growth, tenant activity is improving. Significant lease rolloversscheduled for this year and 2011 have been the driving force behind a large portion of overallactivity in the market. Renewal activity continues to grow but some tenants relocate to takeadvantage of more suitable space, depressed asking rents and concessions. Lease concessions,in the form of free rent, beneficial occupancy and tenant improvement allowances, continueto play a significant role in the transactions taking place. Tenants still have the upper hand aslandlords look to maintain occupancy, maintain balance sheets and make loan payments.

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