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A multi-speed economic and real estate recovery is occurring in Northern California’s office markets. San Francisco and Silicon Valley have been in recovery mode for more than two years with strong growth in both rents and occupancies.
The technology industry is the driving force and has produced about 50,000 jobs in the Bay Area since 2010, according to CBRE’s analysis of data provided by the state of California. This has generated high volumes of office space demand that is concentrated mostly in San Francisco and Silicon Valley. These two markets have seen overall average rents grow by more the 60 percent in the most popular submarkets like South of Market (SOMA) in San Francisco, where prices have reached $53.91 per square foot, and Sunnyvale/Mountain View in Silicon Valley, where they hover at $54.36 per square foot.
As conditions tightened, activity fanned out to neighboring submarkets, causing new development in popular submarkets to ramp up. The southern portions of the San Francisco Peninsula, northern portions of San Jose and southern portions of the East Bay markets adjacent to Silicon Valley have all benefited from overflow demand. San Francisco has not yet produced significant overflow demand, although further rental rate increases are likely to cause some non-technology firms to evaluate lower cost options in Oakland and other cities along BART transit lines.
While leasing activity has increased and vacancies have decreased in Oakland and the I-680 Corridor areas of the East Bay, average rents have not yet risen back to peak levels achieved in 2007. They have recovered from the lows of 2010, but remain about 10 percent below the peak.
They stand at just more than $25 per square foot in both markets. These market have experienced a slow recovery from deep job losses as a result of the financial and housing crises, but have staged a gradual recovery about one year ago that could gain steam from growth in other parts of the Bay Area.
Sacramento has been building the foundation for recovery over the past 12 to 18 months with positive occupancy gains and firming rents that have drifted lower since 2007. The financial, housing, and state budget issues have plagued the office market and restrained job growth, which still trails national averages. The housing market recovery in most of Northern California is further boosting economic activity and is anticipated to produce greater demand for commercial real estate in the years ahead.
— Colin Yasukochi, director of research & analysis for CBRE in San Francisco