Manhattanization of San Francisco's Skyline Continues

Just when you thought there was no more room for construction cranes in downtown San Francisco, a new crop of office towers is sprouting on the city skyline.

From Mission Bay to the north Financial District, more than 5 million square feet of commercial space is under construction or will be in the next 12 months. That’s more new office space than the city has produced in the previous 15 years combined.

The bullish development is being driven by the usual cocktail of low vacancy and high demand — with a dash of San Francisco politics thrown into the mix, say developers and brokers.

While skyscrapers like 350 Mission St. and 222 Second St. are nearing completion, others are just getting off the ground. At 350 Bush St., backhoes are preparing the site for a 19-story building that will incorporate the historic Mining Exchange next door. At 1800 Owens St. in Mission Bay, Kilroy Realty Corp., which is developing 350 Mission St. for Salesforce and 333 Brannan St. for Dropbox, will start work by April on a 700,000-square-foot, four-building complex that is being marketed as the Exchange.

Photo: Parktowerattransbay.com

A rendering of the proposed Park Tower at Transbay (center) with several other developments including the Salesforce tower (left).

Already several tenants have looked seriously at pre-leasing space in the Exchange.

“We are pretty far down the road with one tenant,” said Mike Sanford, Kilroy executive vice president. “There are so many users out there. Most tenants we are talking to want half or all of the property. We are looking for the right fit.”

Meanwhile, developers Golub & Co. and the John Buck Co. have already rolled out a marketing campaign for what they are calling the Park Tower at Transbay, a 43-story high-rise planned for a city-owned parcel at Beale and Howard streets near the new Transbay Transit Center. The $44 million land sale for that project, which will break ground early next year, will help pay for the transit center.

The rule of thumb in commercial real estate is that new office construction makes sense when vacancy rates fall below 10 percent.

The vacancy rate in the central business district is now below 8 percent, while some submarkets, such as SoMa, are under 5 percent. The lack of available space has forced fast-growing companies such as Dropbox, Splunk, Uber, Salesforce, Twitter and LinkedIn to lease entire buildings before they are even topped off. Six of the eight buildings that opened in 2014 or will open in 2015 are 100 percent pre-leased.

Quest for headquarters
Even with all the San Francisco companies that have made major commitments, there are plenty of others still on the prowl for corporate headquarters, said Christopher Roeder of commercial broker Jones Lang LaSalle, who is doing the marketing for the Park Tower at Transbay. Roeder counts 14 tenants in the market looking for at least 100,000 square feet, while only seven spaces are large enough to accommodate a tenant of that size.

“I think people are past wondering, by a long shot, whether all the stuff under construction will lease,” said attorney Tony Natsis of the firm Allen Matkins, who negotiated many of the recent large tech leasing deals, including deals for Salesforce, Uber and Dropbox. “We just have too many ass-kicking companies in San Francisco.”

While Jones Lang LaSalle would not identify active tenants looking in San Francisco, sources said they include Stripe, Atlassian, Lyft, Zenefits and Castlight Health. UCSF is also a candidate for the Kilroy complex in Mission Bay.

“I think the market is extremely deep and extremely broad and is continuing to grow,” said Bill Cumbelich of CBRE, whose team is marketing both 350 Bush St. and the Exchange.

Of course, development in San Francisco is hugely expensive — the Park Tower will cost about $690 million — and developers would not be swarming all over the city if they didn’t think they could make a buck or two. Average Class A rents in the city are $67 per square foot, according to CBRE. New construction needs to get an average of $75 or $80 per square foot to make economic sense.
“You can’t build this stuff unless tech companies are willing to pay the freight — and they are,” Natsis said. “Rent is not the fight with these guys. It’s more about delivery timing, about power, about expansion rights, about control over common areas and whether they can their take their dogs to work.”

No worries over oversupply
Developers who are sitting on approved projects are also encouraged by the city’s Proposition M law, which caps the amount of new office space that can be approved each year at 875,000 square feet. With the backlog of projects seeking approval well in excess of what is allowable under the Prop. M cap, developers who have fully entitled projects ready to go are feeling extra confident that regulation will ensure that there won’t be a glut of space.

“Prop. M will start becoming a governor this year, so you don’t need to worry about oversupply,” Sanford said.

San Francisco’s wave of new office buildings is in keeping with other major markets. Seattle has 4.1 million square feet of office space under construction. New York has 5.2 million square feet, while Dallas has 5.2 million square feet. Developers in Houston, notorious for its lax zoning, are putting up more than 15 million square feet of office space.

“It’s extremely important that this space gets built. It’s the only way to keep rents from skyrocketing,” Cumbelich said. “That is where we have gotten into trouble in the past — we run out of space, rents spike, the market gets destabilized, and tenants have to go elsewhere.”


J.K. Dineen is a San Francisco Chronicle staff writer.

E-mail: jdineen@sfchronicle.com Twitter: @sfjkdineen

Article & photos sourced from http://www.sfgate.com/realestate/article/Low-vacancy-high-demand-drive-office-building-6084225.php#photo-6779227