San Francisco’s real estate market is home to one of the most fierce and competitive areas in the country. From commercial to residential, space is extremely limited, often driving the already sky-high rents and costs even higher. Although there is a great deal of expansion for both commercial and residential properties, the supply continues to struggle with keeping up with the demand of the growing population.
Commercial Real Estate
The San Francisco commercial real estate market is a competitive area with all major economic indicators pointing towards sustaining if not accelerating levels of growth, particularly when it comes to employment. Much of it is Class A commercial real estate, and is concentrated in San Francisco’s Financial District. Vacancy rates have been steadily declining, and the amount of sales in 2016 is the second-largest year in the city’s history. Much of this growth is attributed to strong job growth in the private sector, with +2.4% growth year-over-year.
The availability of office market space has steadily increased to 11.2%, with an overall vacancy rate of 7.7% (Q3 2016). This includes over 1.1 million sq/ft in existing buildings, some of which will be available in 2017. Nearly 5.7 million sq/ft of new office space is expected to be delivered by the end of 2017 with 61.9% of this space already pre-leased. Tenant demand for office space in the city remains strong with a total inventory estimated to be 77.8 million sq/ft.
Investor demand has been kept high due to San Francisco’s low vacancy, high rents, and strong tenant demand. Recent, large scale, acquisitions of the year include Norges Bank Investment Management’s purchase on 1st Street for a reported $435 million ($935/ft) and HNA EcoTech’s purchase of 123 Mission Street.
The overall asking rent for Class A is $71.04 with a vacancy rate of 7.9%, for Class B is $65.74 with a vacancy rate of 8.0%.
The retail market space availability throughout the city continues to remain tight as it has in recent years, with an overall vacancy rate of 1.9% (Q1 2016), which is among the lowest in the nation. Due to this, rental rates have risen, increasing from 5.4% “YoY” to $685 psf/yr in Union Square and 7.1% “YoY” to $530 on Post Street.
Year-over-year, rental rates have changed each quarter by 4.6% overall to 73.81 psf. Some significant sale transactions in this sector during the first quarter are as follows:
Residential Real Estate
San Francisco has a very strong residential real estate market, evidenced by steadily rising sales prices and one of the lowest vacancy rates in the country. This is due in part by residential space constraints within the city itself. Construction of new houses are basically at a stand-still while demand remains high resulting in a dwindling supply. San Francisco is densely populated with the majority of the population living in mutli-unit dwellings. New residential developments are taking the form of condominiums and infill development, largely in the SoMA and Potrero Hill districts.
In recent years, condos were not able to keep up with the demand but this trend appears to be shifting. As of early April 2016, the number of condos actively listed are up 40% and this does not include brand new units not yet on the market. This does not mean, however, that units are not selling but rather the demand-per-listing ratio is diminishing, where there are fewer offers on the table, and some listings are even expiring without being sold at all. Some analysts believe that this new sudden inrush of condo projects within the city is outpacing the buyer demand for such units.
San Francisco home appreciation during Q1 2016 has not proven to show any sort of market cooling. Median sales prices for both houses as well as condos remain close to high points during the spring of 2015. For the first time in years, condo prices in 2016 did not jump although they did not fall either.