San Francisco Bay Area Real Estate Update

June 11, 2014

The San Francisco Bay Area has always been an economic magnet, drawing a high concentration of capital with its highly educated workforce, reputation as the country’s technology capital, and unique cultural landscape. It’s this same magnetism that is currently keeping the Bay Area real estate market robust and poised for further growth. According to a Cassidy Turley (acquired by DTZ which was then acquired by Cushman & Wakefield) commercial forecast, the area “has been routinely accounting for 40% or more of all venture capital distribution and this number continues to move closer to the 50% mark.” Local companies are investing this capital to create new technologies, and “expanding their real estate footprints in order to support these efforts.” Here’s how the recent influx in capital is affecting each of the major property types’ performance.

Historically the Bay Area office market has been a hub for large users, and 2014 is no exception. Fueled by major expansions of tech juggernauts like Google, eBay, Facebook, and Salesforce, the current market is strong, with some areas performing better than others. Vacancy rates in core parts of San Francisco, San Mateo County, and Santa Clara County remain low, and rents have been moving in an upward trend since 2010 (post recession).

According to the Cassidy Turley report, “The San Francisco Bay Area’s 361 million square foot industrial market closed Q3 of 2013 with an overall vacancy rate of 6.7%.” It has come down further in 2014. “The San Francisco industrial marketplace is home to only 20.4 million square feet of product and this market is only going to be getting smaller.” This supply phenomenon is a result of the lack of available land and high cost to rent and operate industrial space, prompting a trend in the conversion of industrial space to property types with higher and better use.

Retail has always had a healthy place in the San Francisco Bay Area market. The lack of land, population with a concentration of higher income levels, and strong historical performance has made the Bay Area a favorite location for national retailers, fostering low vacancy rates and higher rents.

Rents are on the rise due to low unemployment rates and increasing income levels in core Bay Area locations. Vacancy levels are also at all time lows. Many investors view multifamily properties in the SF Bay Area as a safe haven investment. Consequently, capitalization rates for investment sales of apartments remain at all time low levels.