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Cushman & Wakefield
0 2 4 6 8 10 12
1945-48
1949-53
1954-57
1958-60
1961-69
1970-73
1975-80
1980-81
1982-90
1991-01
2001-07
2009-18
Years
9.8 Years –2nd longest
10.1 Years - longest
8.8 Years – 3rd longest
It’s tracking to become the longest U.S. economic expansion
Cushman & Wakefield
Office Market Comparison – Vacancy Rate and Average Asking Rent – Q4 2018 San Francisco has the lowest major market vacancy rate and highest asking rent
Source: Cushman & Wakefield; PRELIMINARY STATS
Seattle
8.0% / $34.68
San Francisco
6.4% / $75.57
Silicon Valley
10.3% / $54.12
Austin
10.6% / $36.26
Boston
9.7% / $36.97
NYC (Manhattan)
9.2% / $72.28
Washington, DC
14.1% / $54.34
Portland
11.8% / $29.85
United States
13.2% / $31.54
Chicago
18.5% / $29.97
Denver
15.2% / $28.21
Los Angeles
13.9% / $39.75Phoenix
15.6% / $25.83
Salt Lake City
12.4% / $24.30
Atlanta
16.2% / $26.64San Diego
14.2% / $36.84
Oakland (CBD)
7.9% / $55.22
Dallas/Fort Worth
18.6% / $26.58
Charlotte
7.6% / $26.25
Sacramento
9.2% / $22.68
Cushman & Wakefield
Economic / Demographic Comparison – Select MarketsCost of living (housing) is the key issue for the Bay Area
City Cost of Living Index % Millennials Avg Hourly Wage Educational AttainmentOverall Avg Office
Asking Rent
Silicon Valley 173.0 21.9% $43.01 50.1% $54.12
San Francisco 172.8 22.0% $39.01 48.5% $75.57
Oakland 172.8 22.0% $39.01 48.5% $55.22*
Seattle 137.3 22.8% $37.26 42.0% $34.68
Los Angeles 128.8 22.7% $29.10 33.5% $39.75
San Diego 128.4 24.3% $29.43 37.4% $36.84
New York City 119.7 21.3% $32.25 39.0% $72.28
Portland 113.4 21.3% $28.13 38.9% $29.85
Austin 114.7 24.5% $28.94 42.8% $36.26
Denver 112.7 22.4% $30.01 42.5% $28.21
Dallas-Fort Worth 111.7 21.3% $27.21 33.9% $26.58
Sacramento 110.0 21.1% $27.75 32.6% $22.68
Salt Lake City 109.2 23.2% $26.89 33.0% $24.30
Phoenix 93.8 20.9% $26.86 30.8% $25.83
U.S. 100 20.7% $26.84 31.3% $31.54
Cost of Living Index – Moody’s metro level; U.S. = 100
Millennial Population (Ages 20 to 34) – Moody’s
Hourly Wage – U.S. Bureau of Labor Statistics
Educational Attainment – Moody’s; Population with a Bachelor’s Degree or Higher
Overall Office Asking Rent – Cushman & Wakefield (Preliminary) Fourth Quarter 2018; *Oakland Rent is Central Business District
Cushman & Wakefield
NorCal– Solid Economic FundamentalsJob Growth in Major Markets
Healthy job growth levels across
the major MSAs including San
Francisco-Oakland-San Mateo,
San Jose and Sacramento.
Majority of job growth in San
Francisco has been within the
office-using sector.
Sacramento office-using sector
year-over-year in negative
territory though forecast to move
back into the black over the next
year.
Key Takeaways
102,640 101,490
87,160
67,710
60,610
52,892
47,76045,400
39,800 38,91036,400 35,780 34,820
29,860
12,970
1.1%
2.8%
2.9%
1.1%
3.0%
1.5%
1.8%1.9%
3.6%
1.5%
1.3%
2.5%
1.2%
0.6%
1.3%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
0
20,000
40,000
60,000
80,000
100,000
120,000
Ne
w Y
ork
Da
llas
Ho
usto
n
Los A
ng
ele
s
Se
attle
Wash
ingto
n,
DC
Atla
nta
Sa
n F
ran
cis
co
Sa
n J
ose
Mia
mi
Bo
sto
n
De
nve
r
Ph
ilade
lph
ia
Ch
ica
go
Sa
cra
me
nto
Non Office-Using Office-Using % Growth YOY
Source: Moody’s/BLS; Metropolitan Statistical Area level data
Cushman & Wakefield
Office Jobs versus Total Jobs
Source: Moody’s/BLS; All markets are MSA level except metropolitan division (MD) where noted
Of all the major U.S. markets,
San Francisco and San Jose
have the largest percentage of
office to total jobs.
NYC has, by far, the most office
jobs of any market.
Key Takeaways
39.4%
32.2%30.7% 30.1%
28.7% 28.5% 28.2% 27.6% 27.0%26.1% 25.6% 25.4%
23.9% 23.3% 23.3% 22.8%
19.7%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
0.0
500.0
1,000.0
1,500.0
2,000.0
2,500.0
Percentage Private Sector Office Jobs to Total Jobs Total Office Jobs (millions)
Cushman & Wakefield
Tech Industry Job Growth (all jobs at tech companies)Forecast metro area for YE 2017 through YE 2022
Source: Moody’s/BLS, Cushman & Wakefield
Generally, less expensive
markets are expected to record
the largest tech job increases
over the next five years.
Over the past five years
(YE 2012 through YE 2017) San
Francisco tech jobs jumped by
34.0%.
San Jose and Austin tech jobs
increased by 23.6% over the
previous five years followed by
Seattle at 23.3%.
Key Takeaways11.1%
10.1%
8.5%8.1%
7.7%
6.9% 6.7% 6.6%6.2%
5.9% 5.7% 5.6%
4.7%
3.7% 3.7%
2.8%2.3%
221
100
88
188
491
327
273
106
101 101
162
58
295
41
301 307
122
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
100
200
300
400
500
600
Fiv
e-Y
ea
r P
erc
en
tag
e G
row
th
Tho
usands o
f Job
s
Forecast Job Growth Current High-Tech Jobs
Cushman & Wakefield
2013 2018
WHERE HAVE WE BEEN?
CITYWIDE OVERALL ASKING RENTS VS VACANCY RATES
SAN FRANCISCO
41% INCREASE IN
RENTAL RATE
340 BPS
DECLINE IN VACANCY
WHERE ARE WE NOW?
FULL SERVICE
ASKING RENTCHANGE/YEAR VACANCY RATE CHANGE/YEAR
Q4 13 $53.46 9.8%
Q4 14 $60.87 +13.9% 7.4% -240 BPS
Q4 15 $68.14 +11.9% 5.9% -150 BPS
Q4 16 $69.77 +2.4% 8.0% +210 BPS
Q4 17 $71.02 +1.8% 8.6% +60 BPS
Q4 18 $75.57 +6.4% 6.4% -220 BPS
BPS = Basis Points
Q4 2013 OVERALL
INVENTORY – 73,919,488 SF Q4 2018 OVERALL
INVENTORY – 82,280,598 SF
Cushman & Wakefield
2013 2018
WHERE HAVE WE BEEN?
CBD CLASS A DIRECT ASKING RENTS VS VACANCY RATES
SAN FRANCISCO
42% INCREASE IN
RENTAL RATE
260 BPS
DECLINE IN VACANCY
WHERE ARE WE NOW?
FULL SERVICE
ASKING RENTCHANGE/YEAR VACANCY RATE CHANGE/YEAR
Q4 13 $57.98 8.0%
Q4 14 $65.34 +12.7% 7.7% -30 BPS
Q4 15 $72.96 +11.7% 6.1% -160 BPS
Q4 16 $74.13 +1.6% 7.2% +110 BPS
Q4 17 $76.05 +2.6% 8.0% +80 BPS
Q4 18 $82.12 +8.0% 5.4% -260 BPS
BPS = Basis Points
Q4 2013 CBD CLASS A
INVENTORY – 39,888,644 SF Q4 2018 CBD CLASS A
INVENTORY – 44,538,857 SF
Cushman & Wakefield
San Francisco Citywide Overall Asking Rent vs NASDAQAs NASDAQ goes so goes the San Francisco real estate market; close eye on the financial markets in first half of 2019
0.00
1,000.00
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19
93
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NA
SD
AQ
Qu
art
erly C
lose
SF
Cityw
ide O
ve
rall
Askin
g R
ent
SF Overall Asking Rent NASDAQ
2 Quarter Lag
3 Quarter Lag
Source: NASDAQ, Cushman & Wakefield
Cushman & Wakefield
San Francisco Citywide Overall Asking Rent vs VC Spending• Not tracking as closely as in the past; wild swings in major late-stage funding rounds
• For full-year 2018, capital invested reached a record $24.9B with 1,214 deals (previous peak of $18.0B in 2000).
• Major VC deals in Q4 2018 included Instacart ($871M), Lime ($335M), Coinbase ($300M) and Plaid ($250M) – all late stage rounds.
$0.00
$1,000.00
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Q1 2
010
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010
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018
SF
VC
Investm
ent (b
illio
ns)
SF
Cityw
ide O
vera
ll A
skin
g R
ent
San Francisco Overall Asking Rent San Francisco VC Investment (Billions)
Source: PitchBook, Cushman & Wakefield
Cushman & Wakefield
San Francisco Overall Asking Rent vs (Pre to Early Stage) VC Spending• Juul with a $1.235B round in Q3 pushes 2018 to a record level within the early stage category ($7.1B for the year)
• By industry, biotech and financial software drove the San Francisco market during the year
$0.00
$500.00
$1,000.00
$1,500.00
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$3,000.00
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Q1 2
010
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010
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018
SF
VC
Investm
ent (b
illio
ns)
SF
Cityw
ide O
vera
ll A
skin
g R
ent
San Francisco Overall Asking Rent San Francisco VC Investment (Billions)
Source: PitchBook, Cushman & Wakefield
Cushman & Wakefield
Likely IPOs in 2019The year of the mega-deals?
Source: PitchBook, Cushman & Wakefield
Public markets have seen only 6 VC-backed exits
over $10B since 2007 though 5 of the 7 San
Francisco companies listed here have valuations
above that figure
But public markets have been struggling in late 2018
and early 2019; nevertheless many companies are
expected to push through during this volatile period
(as opposed to total downturn)
Heavily weighted to San Francisco-based companies
Company Valuation Primary Industry Year Founded Employees
Uber $72.0B Automotive 2009 17,000
Airbnb $31.0B Hotel/Leisure 2008 4,000
Stripe $20.3B Financial Software 2010 1,300
Lyft $15.1B Automotive 2007 3,000
Pinterest $12.3B Social Content 2008 1,500
Slack $7.1B Communications 2009 1,000
Postmates $1.1B Social/Platform 2011 680
50 San Francisco-based VC-backed companies
currently with $1B+ valuation (unicorns)
Cushman & Wakefield
San FranciscoProp C Commercial Rent Tax for Childcare and Early Education (June 2018)
What is it?
A commercial rent tax approved on June 5, 2018; expected to bring in $146 million a year with 85 percent designated for childcare and educations and 15 percent for general city
purposes.
This is an additional tax on “individuals and businesses that receive income from the lease or sublease of commercial space, primarily offices” with annual gross receipts greater
than $1 million.
In addition to the existing gross receipts tax (which ranges from 0.285 percent to 0.3 percent) this measure will impose a new tax of:
1% on the amounts a business receives from the lease of warehouse space in the City; and
3.5% on the amounts a business receives from the lease of other commercial spaces in the City.
“Effectively, this measure would increase the tax rate for commercial rent income to 3.785 percent or 3.8 percent for most types of commercial space.”
Proposition C exempts commercial landlords with less than $1 million in gross receipts, along with rents for nonprofit, government, arts, industrial, and non-formula retail uses,
among other state exemptions.
Impact:
Cost of doing business in SF just became even more expensive
Landlord cost to own commercial RE in SF increased
Tenant rent will go up.
NNN leases more attractive to Landlords
Bifurcates rent from expenses (LLs may claim only rent should be subject to gross receipts)
Pushes costs onto tenants
When does it go into effect?
January 1, 2019 NOTE: Prop C can be amended or repealed by the Board of Supervisors by ordinance without going back to voters.
Source: City of San Francisco, Spur, Cushman & Wakefield
Cushman & Wakefield
San FranciscoProp C Gross Receipts Tax for Homelessness Services (November 2018)
What is it?
A business tax approved on November 6, 2018
Increases gross receipts tax on a sliding scale for businesses with over $50M in gross receipts OR
Certain businesses with administrative offices in San Francisco, at least $1 billion in gross receipts and at least 1,000 employees nationwide would be required to pay an annual
homelessness administrative office tax (rather than the gross receipts tax) at a rate of 1.5 percent of payroll expenses.
Expected to bring in $300 million a year with 50 percent to permanent housing, 25 percent to mental health services, 15 percent to homelessness prevention and 10 percent to short-
term shelters.
Impact:
Cost of doing business in SF will become even more expensive
Preliminary count of businesses affected: 174 businesses occupying 25.6 MSF (31% of San Francisco inventory) with the average size of 147,000 SF
When does it go into effect?
Funds will be collected beginning January 1, 2020 but frozen due to legal dispute regarding whether simple majority or two-thirds majority threshold was required for passage.
Source: City of San Francisco, Ballotpedia, Spur, Cushman & Wakefield
Business Activity Set Tax Increase
Retail/Wholesale Trade 0.175%
Biotech, Clean Tech, Information, Food Services, Manufacturing, Transport 0.500%
Accomodations, Utilities, Arts/Entertainment/Recreation 0.425%
Admininstrative/Support, Private Education, Health Services 0.690%
Construction 0.475%
Financial Services, Insurance, Professional/Scientific/Technical Services 0.600%
Real Estate/Rental/Leasing Services 0.325%
18Cushman & Wakefield
San Francisco – Prop M8.9 MSF in the pending phase (large cap projects over 50,000 SF); potential to add 1.6 MSF to the allocation from prior residential and hotel conversions.
PROJECT DEVELOPER STATUS ENTITLEMENT (SF) REMAINING (SF)
ALLOCATION FOR 2017
(occurred 17 October 2016)
875,000 1,318,869
633 Folsom St Swig Entitled (90,102) 1,228,767
ALLOCATION FOR 2018
(Occurred 17 October 2017)
875,000 2,103,767
552 Berry St/1 De Haro St SKS Entitled (86,301) 2,017,466
ALLOCATION FOR 2019
(Occurred 17 October 2018)
875,000 2,892,466
*Pier 70 Forest City Pending (1,810,000)
*Mission Rock Giants Pending (1,300,000)
542-550 Howard St -Transbay F Hines Pending (288,677)
2 Henry Adams RREEF Pending (245,697)
1800 Mission St - Armory AJ Capital Pending (119,599)
610-698 Brannan St/Flower Mart - Central SoMa Kilroy Pending (2,030,560)
598 Brannan St – Central SoMa Tishman Speyer Pending (922,291)
88 Bluxome Street - Central SoMa TMG/Alexandria Pending (833,040)
725-735 Harrison Street –
Central SoMa
Boston Properties Pending (770,301)
400 2nd St – Central SoMa Cresleigh Pending (421,000)
505 Brannan Street – Central SoMa TMG Pending (165,000)
* Office allocation will be provided automatically on a per-permit basis, at the time of issuance of each building permit.
Availability as of
January 2019
20Cushman & Wakefield
San Francisco Remaining Big Blocks Moving Fast
ADDRESS SUBMARKET TOTAL
BUILDING SQ
FT
AVAILABLE SQ
FT
OCCUPANCY DATE STATUS COMMENTS
50 First Street
(Oceanwide Center)
South Financial 1,050,000 1,050,000 2022 Under Construction Mixed-Use Complex
1455 Market Street Mid-Market 1,026,000 326,000 2020 Built Uber relocating to Mission
Bay
50 Beale Street South Financial 662,000 321,000 2019 Built; Renovation
planned
BlueShield moving out
45 Fremont Street South Financial 596,000 280,000 2019 Built Wells Fargo and others
633 Folsom Street South Financial 269,000 269,000 2020 Built; adding floors and
renovation
Will be delivered vacant
555 Market Street South Financial 281,000 242,000 2020 Built Uber relocating to Mission
Bay
215 Fremont Street South Financial 373,000 187,000 Immediate – Sublease
Five-Year Term
Built Fitbit
Mega block availabilities (150K and larger) through end of decade are sparse; several below have leases pending
21Cushman & Wakefield
1.7 1.8 1.7
0.61.4 1.4
2.31.5
2.3 2.21.5
2.0 1.9
1.51.7
1.1
0.7
1.51.9
2.3
1.8
3.5
1.8
2.0
2.23.0
1.41.5
1.1
1.0
1.5
1.8
1.4
1.9
2.4
1.4
1.4
2.1
2.01.7
1.6
0.7
1.1
1.0
1.4
2.5
2.0
1.6
0.81.3
2.41.9
0.0
2.0
4.0
6.0
8.0
10.0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
MS
F
Q1 Q2 Q3 Q4
6.2
8.78.9
6.36.6
4.6
3.4
5.4
6.5
8.5
7.2
9.8
6.3
New LeasingQ4 2018 above quarterly historical average of 1.7 MSF; third best year on record after 2000 (10.5 msf) and 2014 (9.8 msf)
22Cushman & Wakefield
1.6 1.6
(1.1)
(2.3)
(0.8)
2.3
0.8
0.4
3.2
0.9 0.6
(0.3)
4.8
-3.0
-2.0
-1.0
0.0
1.0
2.0
3.0
4.0
5.02006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Net AbsorptionA record-setting year in 2018 for positive absorption with various buildings delivering at 100 percent occupied
23Cushman & Wakefield
Totals are down after strong 2018 leasing but still significant number of tenants in the market121 active tenant requirements totaling 5.2 msf
17%
20%
14%
21%
28%
0% 10% 20% 30%
<10,000 SF
10,000-14,999 SF
15,000-24,999 SF
25,000-49,999 SF
>50,000 SF
Requirements
59.8%
9.2%
6.1%
9.6%
13.0%
0.6% 1.3% 0.5%Software/Tech
FIRE
Legal
Professional Services
Consumer Products/Services
Government/Education
Medical/Health Care
Non-Profit
24Cushman & Wakefield
San Francisco
Market is very tight….
• Much deeper / more sustained expansion compared to the first dot-
com boom with $70.00 / RSF and greater rents for 14 quarters and
counting today vs 5 quarters previously.
• Class A CBD direct rent and Citywide overall rents at all-time highs
- $82.12 / RSF and $75.57 / RSF, respectively.
• 30+ leases signed in 2018 at $90 or higher effective rent - View
space premiums are back!
• Overall vacancy down to 6.4% - minimal big block options.
• Still robust demand – currently tracking 5.2 MSF of tenants in the
market.
• 8.9 MSF of new leasing activity in 2018, third best on record but will
be hard to beat without mega pre-leasing activity in 2019.
• Sublease vacancy = 1.8% or 1.2 MSF total. Good subleases
moving fast.
• San Francisco VC spending is far and away highest in the US.
• VCs sitting on approximately $77B in dry powder and expect much
of that to flow local companies.
….And there are headwinds
• Construction pricing has increased by 25%+ over past 2 years.
• $100+ TI packages increasingly common.
• Limited new supply and rents driving tenants to expand outside of
SF.
• Increasingly difficult / expensive to hire the right talent with office
sector unemployment effectively at 0%.
• Cost of housing, congestion, taxes, homelessness, open drug use.
• Tax increases for child care and education effective 1/1/2019;
business tax to pay for homeless issues effective 1/1/2020.
• Prop M Allocation – less than 3.0 MSF available with 8.9 MSF in
the pending phase.
• Central SoMa passes but timeline of project delivery is long.
• Further tightening of the market expected in the near-term with a
slowdown by 2020.
25Cushman & Wakefield
cushmanwakefield.com
©2018 Cushman & Wakefield. All rights reserved. The material in this presentation
has been prepared solely for information purposes, and is strictly confidential. Any
disclosure, use, copying or circulation of this presentation (or the information
contained within it) is strictly prohibited, unless you have obtained Cushman &
Wakefield’s prior written consent. The views expressed in this presentation are the
views of the author and do not necessarily reflect the views of Cushman &
Wakefield. Neither this presentation nor any part of it shall form the basis of, or be
relied upon in connection with any offer, or act as an inducement to enter into any
contract or commitment whatsoever. NO REPRESENTATION OR WARRANTY IS
GIVEN, EXPRESS OR IMPLIED, AS TO THE ACCURACY OF THE
INFORMATION CONTAINED WITHIN THIS PRESENTATION, AND CUSHMAN &
WAKEFIELD IS UNDER NO OBLIGATION TO SUBSEQUENTLY CORRECT IT
IN THE EVENT OF ERRORS.