percentage of local occupancy demand,
the firm points out, and San Francisco’s
home mortgage delinquency rate stands at
only 1.3%, compared to 3% nationwide.
Other economic indicators are likewise
encouraging. Unemployment has stayed
under 4.5% for nine consecutive quarters.
Office vacancy stood at 8.4% at the end
of 2007, with 805,000 sf of positive absorption for the year, and 277,000 sf in the
fourth quarter, according to CBRE. Overall
average asking office rents have climbed to
$42.02 per sf, but the firm admits that
actual signed rents tend to be noticeably
lower. The various submarkets of the
Greater San Francisco Peninsula showed
even stronger results in 2007 with a positive
net absorption of 2. 2 million sf and a 43%
increase in year-over-year asking rents.
Grubb & Ellis points out that the Bay
Area exceeded most observers’ expectations in 2007, calling the market’s performance “incredible.”
“New construction,” says Grubb,
“most of which is speculative, has ramped
up with a total of 2. 4 million sf in the
works at the end of 2007. The result of
strong growth for 2007 was nearly five
million sf of positive net absorption,
which pushed the overall vacancy rate
down 190 basis points for the year to just
over 11%. Positive net absorption on the
Mid-Peninsula and in the Silicon Valley
doubled in 2007 over 2006. In the East
Bay, it increased elevenfold.”
Bay Area rents, Grubb adds, increased
25% for class A office space and 21% for
class B product. Grubb expects absorption, occupancy and rents all to continue
to rise in 2008, despite economic uncertainty, because of the Bay Area’s leadership in biotechnology, high technology
and venture capital spending.
From an investment standpoint, conditions in the Bay Area are likely to continue to favor the seller this year, although
rent growth should ease and bidding will
likely quiet somewhat on riskier properties, say the experts. Competition will
remain high for well-positioned assets,
however. Since many investors are counting on continued growth in this market,
according to Grubb, value-add plays are
likely to gain popularity over stabilized,
The industrial category still looks
healthy, although CBRE notes a negative
absorption of 400,000 sf in the fourth quar-
ter of 2007. Asking rents have flattened, but
demand remains high and industrial
remains popular as an investment category.
Colliers International reports that San
Francisco’s retail vacancy rate rose 30 basis
points in 2007, to 3.6% from 3.3% at the
end of 2006. However, it’s still less than
half the national urban vacancy rate of
7.4%. Availability in the San Jose/Silicon
Valley area is even tighter at 3.1%.
Both employment and population
growth are forecast to increase in 2008,
and Marcus & Millichap says this will
lead to the city posting the nation’s
strongest multifamily rental gains.
Housing prices are among the highest
in the country, forcing more residents
into the rental pool. Vacancy is likely to
drop by 30 basis points, to 4%, as only
800 new units are scheduled to come on
line. Asking rents are expected to grow
by 7.8%, or 8.6% in terms of effective
THE SEATTLE AREA’S MEGA-EMPLOYERS,
Boeing, Google, Yahoo and Microsoft, all
had strong years in 2007 and are expected
to do well this year, too. As a result of the
thriving business climate, the market’s
employment rate grew by 3% last year,
twice the national average. And Seattle
was also one of the few US cities where
home prices increased.
All these factors have benefited the local
property markets. According to Newmark
Knight Frank, class A office vacancy stood
at 9% in 2007 and class A rents rose 15%.
Even though five million sf of space is under
construction in the Seattle area, NKF anticipates further gains in lease rates this year.
“Seattle’s strategic relationship with
Asia will continue to attract companies to
either develop headquarters or satellite
office space in our region,” reports John
Miller, senior managing director of
Cushman & Wakefield. “Near-term, in-city office space will continue to be strong,
and even with a downturn in the capital
markets, institutional investors remain
bullish on the Puget Sound market.”
Office space is expected to remain
tight. Grubb reports that large users are
still looking for space, and no significant
new product will come on line until 2009.
Rents will inevitably rise as vacancy continues to decline, hovering between 4%
and 6% for class A space in Bellevue.
Rents should probably reach $40.
Downtown Seattle’s vacancy rate will be
between 5.5% and 6% and class A asking
rents are slated to grow by as much as
15%, perhaps topping out at $60 per sf.
Marcus & Millichap maintains that
economic growth in the Puget Sound
region will be among the strongest in the
nation in 2008, with Microsoft, Yahoo
and Google all renting large blocks of
office space in the eastern part of the
metro area and hiring aggressively.
Several high-end condo developments
are under way Downtown and population
growth there is happening mainly in the
20-to- 34 age cohort. Apartments are finding favor with investors and about 3,500
new units are expected to come on line in
2008, causing a slight uptick in the
vacancy rate, probably to 4.9% by year’s
end. Asking rents for residential properties
are expected to rise 6.2% in 2008, and cap
rates for investors may edge higher,
although any increase will be offset by
healthy revenue growth, the firm says.
Industrial vacancy saw an upward
spike last year, as mostly vacant new
deliveries flooded the market. However,
much of that space will be snapped up in
2008, says Grubb & Ellis. Asking rents in
Puget Sound’s industrial core, the Kent
Valley, remain at an all-time high, but
rents will remain flat outside that area.
Seattle remains a prime target for
investors in all property types, says
Grubb. In 2007, office sales alone
amounted to $7 billion, a figure that won’t
be matched in 2008. Cap rates for retail
and residential properties bottomed out at
6% and 5%, respectively, last year and
will begin creeping upward. Retail development is booming, with some six million
sf now under way.
Overall, Seattle’s economy is likely to
grow in 2008 and 2009, but at a slower
rate than last year—3% to 5%, according
to Grubb.—Joseph Dobrian ◆
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