San Francisco tech leases surging, again

Space race: Salesforce, Google still on hunt

Date: Friday, December 7, 2012, 3:00am PST

, Reporter- San Francisco Business Times

San Francisco’s tech leasing market is finishing 2012 with a bang instead of a whimper.

After a strong spring and a summer lull, leasing has picked back up briskly in the fourth quarter, as technology companies led by Meraki, Splunk, SquareTrade and Docusign scooped up 300,000 square feet of space in recent weeks. Leasing activity has brought vacancy south of Market Street down to 3.7 percent, according to brokerage firm CBRE.

With Square’s 250,000-square-foot commitment at 1455 Market St. in October setting the tone, social media and traditional tech companies rushed in to gather square footage while they could. Meraki took 111,000 square feet at 500 Terry Francois Blvd., the first tenant to take space in a building that sat vacant for four years. Docusign grabbed 40,000 square feet at 221 Main St. SquareTrade took 54,000 square feet at 360 Third St., another building that was largely vacant for years, although owner Kilroy Realty Trust is working on two more deals that would bring the 400,000-square-foot building to 85 percent leased.

At another Kilroy building, the brick and timber 250 Brannan St., Splunk expanded into 30,000 square feet, which gives the data mining company the entire 95,000-square-foot building. Publicly traded Splunk has been slowly gobbling up space in the Brannan Street building since moving there from 118 King St. in 2008. It took another floor in 2011, shortly after Kilroy bought the building.

Splunk has agreed to pay $58 a square foot for the space, with 3 percent annual increases, according to a filing with the Securities and Exchange Commission. Splunk’s original early 2008 deal, which was inked just before the Great Recession hammered San Francisco real estate, was for $40 a square foot, suggesting that prime SoMa rents are up 32 percent from that period.

There is almost certainly more to come. The market is abuzz with talk that Twitter cofounder Biz Stone’s incubator Obvious is close to taking 75,000 square feet in the Phelan Building at 760 Market St. That would represent another coup for independent broker Jenny Haeg, who represented Square, Meraki, Airbnb and Dropbox. In addition, GitHub is closing in on an agreement for 40,000 square feet at 275 Brannan St., which Hudson Pacific is renovating, according to brokerage sources.

Finally, there are Salesforce and Google. Salesforce is reportedly working on deals at Rincon Center and One Market that would add 160,000 square feet to its extensive downtown footprint. Salesforce is also a leading candidate to become the anchor tenant at the tower Kilroy Realty is building at 350 Mission St., although Kilroy sources downplayed the notion that an agreement there is imminent.

Google is also a sought-after tenant. The search engine giant is reportedly in the market for upwards of 400,000 square feet in San Francisco and is a strong contender for one of Tishman Speyer’s two SoMa ground-up development projects: the 450,000-square-foot tower at 222 Second St. and the 355,000-square-foot Foundry Square III, which is under construction.

San Francisco is on pace to log 1.3 million square feet of positive absorption for the year — a far cry from the 2.1 million square feet of 2011, but still one of the strongest performances in the United States. Average city-wide full-service office rents jumped by approximately 25 percent in 2012 to $48 a square foot, on top of a 23 percent increase in 2011, according to CBRE.

CBRE Research Director Colin Yasukochi said the rate of rental increases slowed during the second half of 2012. He predicted that the slowing trend is likely to continue, with rent increases next year closer to 10 percent. “It is still going to be strong rent growth by anyone’s measure, but it’s unlikely to be over 20 percent again in this cycle,” said Yasukochi.

Mike Sanford, Kilroy’s senior vice president for Northern California, said that Splunk’s trajectory at 250 Brannan St. — from private to public, from one floor to the entire building — is a story that validates his company’s SoMa strategy. “From a real estate perspective, this is the kind of success story we are shooting for,” he said.

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