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S.F. office market recovery slows in 2006 as rents flatten

By JK Dineen
San Francisco Business Times
October 6, 2006

Tenants continued to soak up vacant office space at a moderate clip in the third quarter, but a paucity of available trophy view space kept average rents essentially flat in San Francisco, according to a third quarter report from Colliers International.

Nearly three years into its recovery, the market absorbed about 400,000 square feet of space in Q3, bringing the total to 1 million for the first three quarters. While observers are expecting a busy fourth quarter, the market will have to catch fire to equal 2005, when 2.3 million square feet were absorbed.

While 222,000 square feet of the absorption took place in the traditional north-of-Market financial district, another 140,000 was absorbed south of Market, according to Colliers. The biggest deal of the quarter -- not including the city of San Francisco's 76,000-square-foot expansion at 1650 Mission St. -- was Advent Software's jump from 60,000 square feet at 301 Brannan St. to 104,000 square feet at 650 Townsend St.

With Tishman Speyer beginning construction on a tower at 555 Mission, vacancy rates are steadily sinking to the single-digit territory that most experts say will justify new towers. Vacancy overall dipped half a percentage point in Q3, down to 11.9 percent, according to Colliers. Financial district vacancies are lower, at 10.8 percent and on track to dip below 10 percent by the end of the year.

But a lack of premium space drove firms into commodity space, tamping down the average rents to $39.90 a square foot, said Colliers Research Director Tove Nilsen.

On the high end, you had deals like Dodge & Cox's 31,000-square-foot lease at 555 California St. at $70 a square foot. But far more typical were the growing tech deals like MicroTek's absorption of 17,500 square feet for $32.28 a square foot at 333 Bush St., Nilsen said.

Greg Fogg, a senior vice president at Staubach, said the market reminds him of 1996, when the technology sector was about to boil over.

"We're telling clients to keep a sharp eye on the next 18 to 24 months," said Fogg, who predicted rents could jump another 25 percent.

Pricey One Market deal

Ironwood Capital Management has taken the entire 25th floor of the Steuart Tower at One Market St, a 16,300-square-foot lease. Bradley Colton, executive vice president and regional manager of Charles Dunn's San Francisco office, represented the tenant. The owner, Equity Office Properties, was represented in-house.

With very little premium view space on the market, the 25th floor was coveted property, Colton said.

"Within the Steuart Street building, this was the only floor with a view available for the next three years."

Ironwood, now at 201 Spear St., will move in April.

Sirna gobbles more space

It's new Mission Bay home won't be ready for occupancy until November, but Sirna Therapeutics is already eating up more space in the building. The firm, which is moving operations from Colorado to Alexandria Properties' 1700 Owens St. building, last week signed a lease to take another 19,000 square feet of space. The deal brings the company's slice of the building to nearly 60,000 square feet. It also gives Sirna the right to grab another 19,000 (half a floor) as needed. GVA Kidder Mathews broker James Bennett, who represented the tenant, was out of town and couldn't be reached for comment.

Meanwhile, the FibroGen deal at Shorenstein's 409-499 Illinois St., easily the most significant lease in the city so far this year, is now a done deal. Reported in the San Francisco Business Times in late July, the finalized lease was announced by Mayor Gavin Newsom at a San Francisco Chamber of Commerce economic summit Sept. 26.

Charles Malet, who heads up leasing at Shorenstein Properties, said the waterfront site and the Dowler-Gruman design sealed the deal for FibroGen.

"We were able to demonstrate that the building was a significant step above typical biotech buildings," said Malet.

Malet said the granite and glass building -- it's really two structures with a "canyon" between them -- is "really a Class A office building" that happens to be a world-class scientific research facility.

"They are viewing this as their corporate headquarters for a long time to come," he said. "It's making a significant statement."

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