The San Francisco office building market is having its best showing since 2007, and commercial office building sales may exceed the $5.3 billion dollar mark by the end of the year. Along with Silicon Valley, the “City by the Bay” is one of the strongest office markets in the country.
A total of 22 downtown office properties were sold from 1 January – 20 July of this year, and three more deals are pending. Ten buildings and two parcels of land are listed and these properties are drawing what is being described as a “robust” level of interest from investors. The average purchase price is currently $465.00 per sq. ft., which is the highest level since the market peaked at $516.00 per sq. ft. in 2007.
The city’s current tech boom is driving up the price of office buildings. Office rents are also on the rise, and Kenneth Rosen, an economist with the University of California, Berkeley, predicted in a recent interview that the cost of renting space may rise another 25 per cent over the next 24 months due to rising demand and tight supply. Over 50 per cent of the 2.6 million sq. ft. (242,000 square meters) of new office space slated to open by the year 2014 has already been leased.
San Francisco’s active commercial property market has caught the attention of a number of real estate investment trusts, U.S. pensions, and foreign investors. With the rate of return on U.S. Treasury Bills a dismal 1.5 per cent, commercial property yields of up to 5 per cent are a much more attractive option.
Investors must be aware of the risks associated with buying office buildings in a city where approximately two-thirds of the city’s commercial tenants are tech firms. Buyers who come into the market late in the cycle are at higher risk if the market experiences a downturn in this volatile market.
