New office construction will not provide supply relief in San Francisco

The new office construction pipeline in San Francisco will not provide supply relief until at least 2022, when not yet started projects could begin to deliver, according to CBRE. Of the 3.2 million square feet under construction with delivery dates prior to 2022, 92 percent is pre-leased.

The unique aspect this cycle, according to CBRE, is the strong growth by tech industry tenants who are not only occupying most new building space, but also backfilling spaces vacated by tenants moving into those buildings or relocating outside the market. In the past, sustained new supply has created vacancies and loosened market conditions.

Given the current supply-demand imbalance, the expectation is for rents to further rise and supply to remain constrained if demand stays elevated. Higher occupancy costs are likely to force more tenants to consider relocation outside of San Francisco and potentially reduce occupancy gains in the years ahead.

Thirteen leases of 100,000 square feet or more totaling 3 million square feet have been completed thus far in 2018. By year-end another 1 million square feet of large leases are expected to be signed, which would surpass 2017’s record of 20 deals for 3.9 million square feet.