San Francisco Bay Area Bulks Up
As the Tech Bust Still Lingers

Developers are constructing a 10-story office building in downtown San Francisco, and some say more could be on the way, even though the city's economy still hasn't quite recovered from the tech bust.

Equity Office Properties Trust, which already owns 9.9 million square feet of office space in the San Francisco area, expects to complete its 335,000-square-foot office building next year. It will house the global headquarters of Barclays Global Investors, a unit of Barclays PLC, and offer coveted views of the San Francisco skyline and bay.

When EOP began discussions with Barclays about a year ago, the developer didn't believe the market could support the building without a secure rent stream, says Mark Scully, senior vice president of national leasing for EOP. EOP gained the confidence to break ground when Barclays signed a 15-year lease in November for 96% of the building. "We were lucky," Mr. Scully says.

New office completions in the San Francisco region are expected to more than double in 2006 from last year, and a relatively high proportion of construction is planned, equal to about 7.4% of the region's existing space, ranking the market 13th of the 54 markets tracked by Property & Portfolio Research Inc., a Boston-based research firm.

Jesse Blout, economic-development director for San Francisco Mayor Gavin Newsom, says other developers may move ahead soon, even without anchor tenants, to meet anticipated demand for high-end space with dramatic views -- space now in short supply. "It's a boomlet that could potentially become something bigger," Mr. Blout says of the planned office-construction activity.

Last month, Tishman Speyer Properties signaled its interest in proceeding when it asked to reactivate its planning permit for a proposed 560,000-square-foot office building at 555 Mission St. That project appears to have no tenants yet, says Amit Ghosh, comprehensive planning chief in the San Francisco planning department. A spokesman for Tishman declines to comment on the project.

Many of the blueprints now being dusted off were in the works before the dot-com collapse. They are being considered amid an improving but uneven office-leasing market and a soaring investment market. Improvement in the San Francisco region's vacancies has been impressive, with rates falling to about 17% in the fourth quarter from a 24% peak in 2003. Average office rents of $27.08 a square foot for the region in the fourth quarter were up from a low of $24.45 in 2004, but still well below their 2001 peak of $63.38, PPR says. Asking rents for top-tier buildings in downtown San Francisco were about $47.57 a square foot in the first quarter, says Brad Van Blois, a senior research associate with Cushman & Wakefield in San Francisco.

Meanwhile, investors betting on a tech recovery are still pushing up prices paid for office properties. In the first two months of 2006, office properties fetched an average price of $412 a square foot, up about 39% from a year earlier and well above the $190 a square foot average paid in 2005 nationwide, according to Real Capital Analytics in New York.

Some market watchers warn development without significant preleasing could be risky. For starters, San Francisco-area employment is 12.4% below its level five years earlier, though there have been steady gains since last year, according to the Bureau of Labor Statistics. In addition, the metro area's California cachet comes at a steep price that PPR says could damp economic expansion. Living costs are about 52% above the national average, according to Moody's Economy.com., a unit of Moody's Corp.

Other than wooing a new company to the region, it isn't clear where a new anchor tenant would come from to support another new building in the near term, says Kevin Brennan, an executive vice president of New York-based real-estate brokerage firm Studley Inc. in San Francisco. With tech firms approaching real-estate needs more conservatively, few companies already based in the market are looking for large blocks or are willing to pay the above-market rate of $50 a square foot or more that new construction would require, Mr. Brennan says. But all that could change in 2010, he says, as some 28 leases over 50,000 square feet are expected to expire.

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