San Francisco Rising

Have you noticed the influx of traffic, scaffolding, and cranes?   It’s hard to miss it these days in San Francisco. With all types of real estate booming in San Francisco, seeing cranes all around us has become a regular part of our skyline. Our city is experiencing its highest level of real estate development in more than a decade, and it shows little sign of slowing down.

Looking just at new office buildings, or mixed use properties that include office space, it is noteworthy that most new office developments are already full or partially leased by large tech companies.   Those include the likes of Dropbox, LinkedIn, Salesforce and Trulia.

Some of the largest and most notable new development projects in San Francisco that are already under construction are presented in the following chart (as of November 2014):

PROPERTY TENANT SQUARE FEET +/- % PRE-LEASED
85 Bluxome N/A 55,000 0%
333 Brannan Dropbox 185,000 100%
345 Brannan Dropbox? 102,585 100%
350 Bush N/A 372,000 0%
181 Fremont N/A 404,000* 0%
350 Mission Salesforce 420,000 100%
415 Mission Salesforce 1,400,000 50%
535 Mission Trulia 303,780 20-25%
222 Second LinkedIn 450,209 100%

Chart above is in alphabetical order, by Street address.

* 181 Fremont is a mixed used property. 404,000 sq. ft. is the office portion (plus 74 +/- condos coming soon).

NOTE: The list above includes office buildings where construction has already begun (not including “planned” developments. There are many additional proposed developments in San Francisco, some of which will be built (only time will tell).

In summary, all of these buildings above are projected to be completed within the next 2-3 years. Within that time frame these new properties will bring an additional 3.7 million square feet of office space, of which 1.75 million square feet +/- is still available.

The question is, will this all hit the market and drive up vacancies, or will more tenants continue to prelease this new construction before it hits the market?

Why Efficiency Matters

Ever hear about a load factor? Or, know what it is? And, why should it matter to you? First, let’s define a load factor. A load (aka efficiency) factor is the percentage of an office building that is common area (think lobby, common corridors for a multi-tenanted floor or building, but excludes outside spaces and excludes staircases and elevators). A load factor is also the difference between the rentable square footage (that tenant’s pay rent on) and the usable square footage within a tenant’s office space.

Tenants in San Francisco pay rent based upon “rentable” square footage. Rentable square feet = Usable square feet + Load factor.   In many buildings in San Francisco, especially those with large lobbies and many multi-tenanted floors, have load factors in the 25 – 30% range (sometimes even higher). Think about, that means in many cases the rent you pay goes up by 25 – 30% or more than the usable square footage within your office space.

How do tenants minimize this cost? First, the fastest way to reduce your load factor is to lease a full floor space (instead of a suite on a multi-tenanted floor). Forget multi-tenanted floors, if you can avoid them. With a full floor, there is no long corridor and that means your space is more usable and efficient. Most full floors in San Francisco have lower load factors, typically in the 15 – 19% range, on average.

Case Study:

Scenario 1: 5,000 Rentable Square foot Tenant Leases Space in a Multi-Tenanted floor.   With average rents in 2014 in many building nearing $60 per square foot per year, let’s use a rental rate of $60 per square foot per year.   This tenant’s rent would be $300,000 per year ($60 x $5,000), or $25,000 per month. Using a 25% load factor, that means this tenant only leases 4,000 “usable” square feet within their suite.

Scenario 2: That same tenant leases a full floor with a 15% load factor.   Using the same 4,000 “usable” square feet (so our analysis is apples to apples), that would equate to 4,600 square feet (4,000 x 1.15), using a 15% load factor.   This Tenant leases 400 square feet less, equal to about 9% smaller office space, yet benefits from the same 4,000 “usable” square feet, but at a much lower rent amount. At the same $60 per foot per year rental rate, this tenant saves $24,000 per year in rent ($2,000 per month).   That is real money in your pocket.   And, for larger tenants, the savings are even more dramatic!