Brian Rapela: Record-Setting San Francisco Office Trades Promise Continued Market Strength

Office property sales in the San Francisco market are expected to reach $5.3 billion this year and show no sign of retreating. Investors are viewing the area as a safe haven of sorts, as such gateway cities are looked upon as trustworthy.

That’s a good indication that San Francisco has come back very strongly from the recession. And indeed, office rents have increased faster than in any other major U.S. metro market, as a result of several tech company relocations to the city.

Institutional investors remain very bullish about the San Francisco real estate market in general, and that has helped bolster it, since most properties have been trading at historically low rates—matching though in some cases surpassing investment parameters from the 2006-2007 timeframe. One of the largest deals recorded this year was the $446.5 million purchase by Hamburg-based Union Investment Real Estate of 555 Mission St. At nearly $802 per square foot, it was also one of the most expensive purchases per square foot this year.

The last comparable price record was set in 2007 with Morgan Stanley’s purchase of the One Market complex. That sale amounted to $953 per square foot, as the property was part of a portfolio acquisition from Blackstone Group L.P.

Other recently acquired gems include two office buildings purchased by Clarion Partners on behalf of pension clients. The advisor bought 600 California St. for $147 million, or $603 per square foot, and 475 Brannan St. for $147 million, or $603 per square foot. Meanwhile, the 1.25 million-square-foot office tower at 101 California St. is expected to fetch as much as $1 billion.

While investors seem to appreciate the mercurial San Francisco market, there is still some risk. The presence of neighboring tech giants like Apple Inc., Google Inc. and Twitter has helped drive the property price escalation, but its very uniqueness suggests a phenomenon that cannot endure. In fact, despite all the improvement of the past year, there are signs the market is beginning to cool off. Such strong rent growth without overall economic recovery is worrisome to some investors.

Nevertheless, San Francisco is positioned to remain a desirable location for investment for the foreseeable future.

Brian K. Rapela, MAI, is managing director in Joseph J. Blake and Associates’ San Francisco office.