By John Jarvis

Overall, 2016 was another year of rising rents and bullish landlords throughout the Bay Area commercial real estate markets. But there are signs that the rents in certain submarkets may level off and the boom cycle may slow down in 2017. Up and down the peninsula, big tech companies continue to drive the market with their insatiable appetite for growth, which means headcount, which means real estate. But many of the VC’s funding the next wave of tech are starting to tighten the purse strings. Companies are starting to move away to save cost, including Uber (to Oakland), Bare Escentuals (to New York) and Jamba Juice (to Texas). In 2016, this pullback showed up as increased sublease activity, a number of high profile company stumbles (Zenefits, Theranos), new political uncertainty and a return to incremental rising interest rates. What does all of this portend for 2017 and 2018? It depends. In submarkets where we see aggressive new construction, like San Francisco’s 3 million square feet of new space deliveries expected in 2017, with over half of that built “on spec,” aka not pre-leased, we have the potential for excess inventory putting downward pressure on rising rental rates. In South San Francisco, HCP, BMR, ARE and Phase 3 all depend on the health of the biotech sector, which can be wildly volatile. On the peninsula, landlords need the big companies to stay hungry for space. Regardless, in every part of the market cycle, there are always pockets, and circumstances, and submarkets, where value can be found.

2016 Submarket Highlights & News Bites:

San Francisco

• The big spike in sublease availability was quickly absorbed by companies jumping on the discounted rents including Fitbit sublease from Charles Schwabb (305,500 SF), Lyft sublease from Dropbox (206,000 SF), Nerd Wallet sublease from Twitter (105,000 SF), Stripe sublease from Dropbox (102,400 SF), UCSF sublease from Illumina (97,700 SF) and Airware sublease from Yahoo (60,000 SF).
• Passage of Prop O now allows Lennar to move forward on 5 million SF Shipyard project.
• Central SOMA Plan scheduled to be released in May, likely to add millions of square feet to existing density.
• Mission Rock, San Francisco Giants’ 1 million SF mixed use development around AT&T Park is seeking approval in 2017.
• Chinese investment in Oceanwide Center, project broke ground in December, will build 2^nd tallest tower and add 1 million SF of office space.
• ARE bought the San Francisco Tennis Club for $140M, now needs to wait like everyone else for the Central SOMA Plan before announcing redevelopment plans.
• Big leases signed by Adobe (210,000 SF), Twitch (178,000 SF), Airbnb (150,000 SF), Quantcast (95,000 SF), Twilio (92,000 SF), Gymboree (80,000 SF) and Thumbtack (79,000 SF).

South San Francisco

• Verily/Google subleased the entire 404,111 SF Onyx space at the beginning of 2016.
• Chinese Greenland Group spent $171 million to buy Oyster Point project, approved for 2 million SF.
• Genentech exercised an option to purchase four buildings it had been leasing from HCP, 450,000 SF for just over $300 million ($681 per SF).
• Big leases signed by Merck (300,000 SF from ARE), Astra Zeneca (116,000 SF from HCP at The Cove).

Upper Peninsula

• Facebook bought 1-19 Hacker Way in Menlo Park, just over 1.1 million SF for $200 million or $187 per SF.
• YouTube bought the Bayhill Office Center from Hudson Pacific (542,520 SF in San Bruno) for $396 per SF.
• Oracle, needing additional “meeting space,” bought San Mateo Marriott for $132 million.
• Big leases signed by GoPro (274,662 SF renewal/expansion in San Mateo), Medallia (210,115 SF in San Mateo), Marketo (131,649 SF in San Mateo), Facebook (135,307 SF in Menlo Park), Open Text (105,015 SF in San Mateo), Goodwin Procter (99,000 SF in Redwood City), Pure Storage (67,045 SF in Mountain View), Volkswagen (sublease for 53,508 SF in Redwood Shores), Meta Company (sublease from GoPro for 49,266 SF in San Mateo).

Silicon Valley

• Rents through the roof. Landlords fearing an end to the bull run, now looking to lock in all-time high rents and longer term leases.
• Kilroy, still bullish, buys 152,000 SF Theranos HQ in Palo Alto for $130 million, $850 per SF, in spite of Theranos struggles and in spite of the fact that the property is subject to a ground lease.
• Apple looking for a Q2 2017 move-in to 2.8 million square foot Apple Campus 2, aka the Spaceship.
• Big leases signed by Google (612,796 SF in Mountain View), Cloudera (224,852 SF in Palo Alto), Ford (150,344 SF in Palo Alto).

North Bay

• The Fireman’s Fund HQ (255,800 SF) remains vacant and available. It will be interesting to watch what happens to this outsized real estate opportunity in relatively quiet Marin.
• SMART opening delayed until Spring 2017. Will people ride it? It will be free until July 4^th to encourage early adopters.
• Larger leases signed by BioMarin (42,710 SF renewal in Novato), Community Action Partners (17,235 SF in Santa Rosa), Radiant Logic (13,725 SF expansion in Novato), Collidion (13,243 SF in Petaluma).

East Bay

• Uber made headlines at the end of 2015 with their $123.5 million purchase of the vacant 380,000 SF Sears Building in Oakland, with plans to move their HQ across the bay in pursuit of lower real estate cost. They filed an $8 million building permit in 2016, with plans to occupy in 2017. Gensler is designing the building renovations so I am sure it will be nice, and I am sure it will cost more than $8 million.
• SAP vacates 420,000 SF at former HQ in Dublin and signs new lease for 150,000 SF at Bishop Ranch, while Chevron consolidates and returns another 250,000 SF of vacant space.
• Big leases signed by Rodan & Fields (150,000 SF in San Ramon), Ellie Mae (143,515 SF in Pleasanton), Zeltiq (109,692 SF in Pleasanton), GE Digital (100,000 SF in San Ramon), Travelers Insurance (90,089 SF in Walnut Creek), Wells Fargo (69,600 SF consolidation/renewal in Oakland), Survey Monkey (38,000 SF in Emeryville).

South Bay

• No plans announced yet for the major land sites acquired in 2015 by Apple and Google in North San Jose.
• Chinese video gaming company LeEco, affiliated with Faraday Futures, buys 49 acres in Santa Clara from Yahoo for $250 million. No plans disclosed for the site, and Faraday Futures reported to be struggling.
• Big leases signed by AMD (220,156 SF in Santa Clara), Fire Eye (189,481 SF in Milpitas), Think Surgical (75,378 SF in Fremont), Corium International (48,240 SF in Fremont).

Parting Thought:

A picture is worth a thousand words…