1Q 2011

Report
Report
SAN FRANCISCO

S T U D L E Y O F F I C E M A R K E T A N D S PA C E D ATA R E P O R T

MARKET HIGHLIGHTS Technology Boom 2.0

LEASE ACTIVITY
Lease activity declined slightly for a second
consecutive quarter. Approximately 1.1 million
square feet were leased in the first quarter, a
40% shortfall from the 10-year historic average.
ASKING RENTS RISE
Optimistic landlords drove asking rents higher
in the first quarter. The average asking rent for
Class A space rose 2.8% to $32.21, full service.
Asking rents for Class B space rose 3.7% to
$29.34.
AVAILABILITY DECLINES
Market availability declined in the first quarter,
from 18.4% to 18.0%. Approximately 14.5
million square feet is currently available for
lease. In comparison, 16.6 million square feet
was available at the market’s peak, 3Q 2009.
LARGE BLOCK INVENTORY DECLINED
SLIGHTLY
The number of available large contiguous blocks
of space (50,000 square feet or more) declined
slightly in the first quarter. 46 large blocks of
space are currently available, compared to 48
last quarter and 48 a year ago.
A booming technology industry is leading San Francisco’s office market out of decline. A decade
after the dot-com bubble, this sector is experiencing a second wave of transformative growth.
Next-generation “web 2.0” technology firms are expanding at a rapid pace, shoring up demand for
office space as traditional tenants in declining industries consolidate operations and increase work
space efficiency.
Global demand for social networking, online gaming, cloud-computing and app development
has risen to new heights. As a result, the tech-heavy NASDAQ index pushed past 2,800
in the first quarter, returning to pre-recession levels. San Francisco and the Bay Area are
benefitting from being the geographic hub for much of the current technological innovation. Many
companies leading the new wave in technology, including salesforce.com, Zynga and Twitter, are
headquartered in San Francisco. The local office market is profiting from the rapid expansion of
next-generation tech firms and rising office space demand on the part of technology tenants has
been welcomed by landlords. However, technology companies are peripheral in San Francisco’s
tenant base, the majority of which has puttered along with the economic recovery.
Market-wide availability declined from 18.4% to 18.0% in the first quarter. In aggregate,
approximately 400,000 square feet of previously available space was removed from the market.
While many tenants continue to downsize upon lease rollover, technology firms are expanding at a
robust pace. Salesforce.com leased four more floors at 123 Mission Street. Additionally, its major
land purchase in Mission Bay eliminated the possibility of constructing a multi-tenant spec office
building that had been proposed in the area. The future Salesforce.com move to Mission Bay will
free up an estimated 800,000 sf to 1.0 million square feet of currently occupied office space in the
North and South Financial Districts.
Twitter dominated news headlines throughout the quarter, finally signing a letter of intent to lease a
large block of space in the historic Furniture Mart at 1355 Market Street. The deal was contingent
upon the city’s recent approval of a new payroll tax exemption. The Mid-Market Street/Tenderloin
area tax exemption, aimed at Twitter, exempts tenants in the area from paying the city’s 1.5%
payroll tax on new hires for up to six years. In addition to Salesforce.com and Twitter, the trend of
web-based tech tenant expansion was exemplified by online social gaming companies Big Point
and Kabam, as well as web discovery engine firm StumbleUpon. Big Point subleased an entire

SAN FRANCISCO
San Francisco CBDCBDTransaction
TRANSACTION BAROMETER
Barometer EAST
East BAY Transaction
Bay TRANSACTION BAROMETER
Barometer
Under One Qtr Over One Qtr Under One Qtr Over One Qtr
50,000 sf Change 50,000 sf Change 50,000 sf Change 50,000 sf Change
Average Term: 5 years 10 years Average Term: 5 years 7 years
Concessions: Concessions:

Free Rent 4 months 8 months Free Rent 7 months 9 months

Tenant Improvements $35.00/sf $65.00/sf Tenant Improvements $30.00/sf $45.00/sf
Moving allowance $2.00/sf $2.00/sf Parking/Other some some

Outlook: Asking price momentum is likely to continue surging ahead of Outlook: Tenant leverage is strong as availability rates remain high,
supply/demand
supply/demand fundamentals
fundamentals, which could slow transaction markets
especially in suburban markets.
velocity.

Up Down Unchanged
 Rental Rate Trends floor in the Orrick Building at 500 Howard Street from Sun Microsystems, while Kabam
($/sf)
$40 subleased a floor at 405 Howard Street from Stantec. StumbleUpon subleased Slide’s
$35
$32.21 old space at 301 Brannan Street, Slide having been previously acquired by Google.
$28.72
$30 As evidenced by these recent transactions, tech tenant demand is heavily focused on
$25 $27.72 $29.34 buildings located south of Market Street and has yet to cross Market Street in a material
$20 way.
$15
$10 Sublease space has steadily declined since peaking in 2009. Now totaling less than
$5 Class A Class B
1.5 million square feet, available sublease space has retreated to pre-recession levels
$0 as active tenants take advantage of discounted rental rates. Conversely, the amount of
2010 1Q 2010 2Q 2010 3Q 2010 4Q 2011 1Q available direct space on the market is still 40% greater than it was in 2007, prior to the
recession. In addition to the 1.5 million square feet of available sublease space, 13.0
Four-Quarter Trailing Leasing Activity* million square feet is available directly. Combined, total market availability is therefore
(msf)
4.5 currently 14.5 million square feet, or 18% of inventory. When landlords were last pushing
4.0 rental rates aggressively in 2007, market fundamentals were in much better shape.
3.5
3.4 3.5 At that time availability totaled just 10 to 11 million square feet, in the range of 13% of
3.0
inventory.
25
2.5
2.0
1.5 1.8 2.0 The San Francisco office market faces a long road to recovery. Despite this fact, positive
1.0 momentum is prevailing. Availability has retreated from historic highs. Inventory is stable
0.5 *Sum of leasing activity in prior four
Class A Class B
and demand for space is slowly increasing. In turn, landlords have increased asking rents
quarters
0.0 over four consecutive quarters. Aggressive hikes in pricing may be a bit premature and it
2010 1Q 2010 2Q 2010 3Q 2010 4Q 2011 1Q remains to be seen whether landlords will be able to make their asking rents stick.

(%) Availability Rate Trends Market-wide average asking rents increased by 3.4% in the first quarter to $31.07. In
25% terms of space quality, Class A rents rose by 2.8% to $32.21 and asking rents in Class
20% 22.3% 19.7% B properties jumped by 4.1% to $29.43. In total, asking rents have increased by nearly
10% in the recovery and landlords are jumping to capitalize on any positive movement
17.9%
15% 16.8% in the market. Owners of Financial District buildings are hoping to experience the
forward momentum tech tenants are creating South of Market. It remains to be seen,
10%
though, whether tech tenants will cross the Market Street boundary to lease traditional
5% “corporate” office spaces.
Class A Class B
0% Most tech tenants in the market have limited their office searches to buildings with
2010 1Q 2010 2Q 2010 3Q 2010 4Q 2011 1Q
creative space in the technology hotbed south of Market Street. The critical issues
keeping tech tenants from expanding into submarkets north of Market Street are a
Overall Large Block Trends*
shortage of such creative space and lack of transportation. Caltrans, which is critical for
60
connecting young workers and engineering talent from the South Bay to offices in San
50 Francisco, does not extend north of Market Street.
46
40
Limited transportation, rising office space costs and, perhaps most critically, high taxes
30 34 are beginning to weigh on business leaders attracted to San Francisco’s amenities and
20 highly skilled work force. San Francisco is the only city in California with legislation in
10
place to tax employee stock options. High-valued, pre-IPO companies would potentially
Contiguous Spaces Over 50,000 sf face huge tax burdens under current legislation if they were to go public and had
0 employees exercise such options. Twitter, it appears, will score the first major victory
2008 3Q 2009 1Q 2009 3Q 2010 1Q 2010 3Q 2011 1Q
in the battle to remain in San Francisco. Its threat to potentially move to Brisbane was
the impetus for the city’s creation of the new Mid-Market Street payroll tax break, and

MAJOR TRANSACTIONS
Selected Transactions
Tenant Sq Feet Address Market Area
Williams-Sonoma 60,000 100 North Point St Waterfront North Beach
Wiley Publishing 57,190 One Montgomery St Financial District North
Wells Fargo Insurance Services 57,081 45 Fremont St Financial District South
Salesforce.com 55,977 123 Mission St Financial District South
Catholic Healthcare West 54,000 185 Berry St Mission Bay/China Basin
California Dept of Health Care Services 36,324 575 Market St Financial District South
ABM Industries Incorporated 31,179 600 Harrison St Rincon/South Beach
Recurrent Energy 30,610 300 California St Financial District North
Big Point 29,000 500 Howard St Financial District South
Kabam 25,897 405 Howard St Financial District South
BTIG 22,372 600 Montgomery St Financial District North
Bank of New York Mellon 22,073
, 100 Pine St Financial District North
Fortress Investment 21,547 1 Market St - Spear Financial District South
A2Z Development 21,419 475 Sansome St Financial District North
Yammer 19,301 410 Townsend St Lower South of Market
Sum of Top 15 Leases 543,970
it appears that Twitter will be able to remain in the city and operate under an eased Overall Rental Rate Comparison
tax structure. San Francisco supervisors are scrambling to modify the payroll tax in SOMA $32.73
additional ways in order to keep other profitable and expanding tenants in town.
Financial District North $32.39

Union Square/Civic Center $32.10

Forecast San Francisco $31.07

The U.S. economy is slowly climbing out of recession. However, employment growth has Financial District South $30.12
$30 12
trailed behind corporate profits, hindering a stronger recovery in commercial real estate Rincon/South Beach $30.05
markets. Up to this point in the recovery, business leaders have chosen to improve
balance sheets and boost productivity rather than add workers. Nevertheless, with Yerba Buena $29.08

steadily growing demand from tenants and limited additions to inventory, tenant leverage US Index $28.53
is expected to diminish slowly in the years ahead. Tenants with near-term space needs
Jackson Square $28.27
would be wise to lock into low rental rates in 2011 as the market begins to rise.
Mission Bay/Showplace Square $27.73

Waterfront/North Beach $25.01

Type

Direct $31.76

Sublet $25.63

($/sf) $0 $20 $40

Availability Rate Comparison

Rincon/South Beach 10.4%

Jackson Square
q 13.5%

Waterfront/North Beach 13.8%

Financial District South 14.3%

14 3%

Financial District North 17.6%

S F
San i
Francisco 18.0%

US Index 18.3%

Mission Bay/Showplace Square 23.6%

Union Square/Civic Center 25.4%

ABOUT OUR FIRM SOMA 25.7%

is the only global tenant advisory firm with a pure tenant representative delivery platform.
Founded in 1954, Studley pioneered this conflict-free business model. Today, with 19 offices nationwide Yerba Buena 32.9%
and an international presence through its London office and AOS Studley throughout Europe, Studley pro- (%) 0% 10% 20% 30% 40%
vides strategic real estate consulting services to top-tier corporations, law firms, nonprofits, government
agencies and institutions of higher education. Information about Studley is available at www.studley.com.

EMPLOYMENT TRENDS
Millions San Francisco* Millions National
1.00 4.0% 140 3.0%
Total Empl. % Ann. Change Total Empl. % Ann. Change
0.98
138 2.0%
0.96 2.0%
2009

0.94 136
1.0%
0.92 0.0%
134
02

0.90 0 0%
0.0%
200

-2.0% 132
2010

0.88 -1.0%
0.86 130
-4.0%
0.84 -2.0%
128
0.82 -6.0%
126 -3.0%
2001

2003

2004

2005

2006

2007

2008

2009

2010

2001

2002

2003

2004

2005

2006

2007

2008
2011

2011

0.80
0.78 -8.0% 124 -4.0%
Source: Bureau of Labor Statistics *San Francisco-San Mateo-Redwood City

STUDLEY OFFICE MARKET AND SPACEDATA REPORT

 MARKET SNAPSHOT: 1Q 2011
MAP SUBMARKET TOTAL LEASING AVAILABLE SF AVAILABILITY RATE ASKING RENTS PER SF

Inventory Last % pp %
SF 12 This Change Yr This Change Yr This Change Yr
(1,000’s) Mos Qtr from Ago Qtr from Last Ago Qtr from Ago
Last Qtr Qtr (1) Last Qtr

Financial District North 29,195 2,206 5,151 -0.4% 5,148 17.6% -0.1% 17.7% $32.39 3.3% $28.82
1
Financial District North - Class A 20,447 1,694 3,773 -0.8% 3,805 18.5% -0.1% 18.7% $33.39 1.6% $29.45

Financial District South 23,658 1,459 3,381 -4.6% 3,713 14.3% -0.6% 15.6% $30.12 4.9% $26.83
2
Financial District South - Class A 19,247 1,202 2,412 -6.4% 2,738 12.5% -0.9% 14.4% $30.46 3.8% $27.46

Rincon/South Beach 4,154 578 434 -12.1% 683 10.4% -1.4% 16.2% $30.05 0.1% $27.08
3
Rincon/South Beach - Class A 1,544 298 160 -23.8% 200 10.4% -3.2% 13.0% $35.00 1.5% $30.70

Yerba Buena 3,343 190 1,099 1.4% 1,274 32.9% 0.5% 38.2% $29.08 0.3% $26.35
4
Yerba Buena - Class A 690 70 433 0.0% 497 62.8% 0.0% 72.0% $29.93 0.0% $28.91

SOMA 4,659 236 1,199 10.8% 1,206 25.7% 2.8% 25.4% $32.73 1.0% $31.48
5
SOMA - Class A 1,848 N/A 176 657.9% 23 9.5% 8.3% 1.3% $33.90 0.3% $31.87

Union Square/Civic Center 4,925 169 1,251 -1.8% 1,365 25.4% -0.5% 27.3% $32.10 2.9% $27.33
6
Union Square/Civic Center - Class A 502 6 134 -0.2% 143 26.7% -0.1% 28.6% $36.77 N/A N/A

Jackson Square 1,956 212 264 -1.3% 326 13.5% -0.2% 15.8% $28.27 2.4% $24.43
7
Jackson Square - Class A 326 77 N/A N/A N/A N/A N/A N/A N/A N/A N/A

Waterfront/North Beach 3,687 278 508 -7.2% 561 13.8% -1.1% 15.4% $25.01 0.1% $23.06
8
Waterfront/North Beach - Class A 912 71 208 -9.3% 131 22.8% -2.3% 14.4% N/A N/A $26.31

Mission Bay/Showplace Square 5,251 165 1,238 -16.2% 1,746 23.6% -3.8% 32.5% $27.73 1.0% $23.87
9
Mission Bay/Showplace Square - Class A 2,643 46 794 -21.9% 1,085 30.1% -5.5% 38.0% $39.32 5.5% $35.00

SAN FRANCISCO TOTAL 80,830 5,494 14,524 -2.8% 16,022 18.0% -0.4% 19.7% $31.07 3.4% $28.35
1-9
SAN FRANCISCO TOTAL - Class A 48,159 3,463 8,090 -4.0% 8,623 16.8% -0.6% 17.9% $32.21 2.8% $28.72

(1) Percentage point change for availability rates.

Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf.
Statistics are calculated using both direct and sublease information. Recent Inventory adjustments may have
contributed to statistical fluctuations in some submarkets.

The information in this report is obtained from sources deemed reliable, but no representation
is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group.
Copyright © 2011 Studley

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STUDLEY OFFICE MARKET AND SPACEDATA REPORT