San Francisco Office Costs Increase the Most in the World

The cost of occupying office space in San Francisco soared the most of any market in the world as technology companies such as Salesforce.com and Mozilla Corp. fueled leasing in the city, according to broker CBRE Group Inc. (CBG)

Occupancy costs -- rents plus local taxes and service charges -- surged 36.4 percent in downtown San Francisco to $90 a square foot in the year to Sept. 30, Los Angeles-based CBRE said in its semiannual survey of world office markets. That was the biggest jump among 133 areas globally.

Demand from technology-industry tenants is combining with low vacancies and limited new supply to increase rents in areas such as San Francisco and suburban Seattle, which had the fourth-largest rise in occupancy costs, at almost 22 percent. That ran counter to much of the global office market, where a recovery cooled as Europe’s debt crisis deepened, banks made cutbacks and emerging-market growth slowed, according to CBRE.

“The U.S. high-tech sector has matured, with new applications for even traditional businesses,” said Asieh Mansour, CBRE’s San Francisco-based head of research for the Americas. “That’s benefited commercial real estate in San Francisco. This is where tech companies are clustered, and where labor skill sets are located.”

San Francisco’s office vacancy has fallen by almost six percentage points in two years to 9.7 percent as of Sept. 30, with leasing by firms such as Hotwire Inc., OpenTable Inc. (OPEN) and Pinterest in the third quarter, CBRE said.

San Francisco’s office market ranked 26th globally for costs. It was third in the U.S., behind midtown Manhattan, at $114.30 a square foot, and Washington, at $94.51.

Hong Kong

Central Hong Kong was the most expensive location in the world at $246.30 a square foot, followed by London’s West End at $219.81 a square foot and Tokyo’s Marunouchi Otemachi at $197.27. Hong Kong also had the biggest decrease in office occupancy costs, with an almost 18 percent decline, as large financial institutions cut expenses, CBRE said.

Twelve of the top 20 most expensive locations for office space were in the Asia-Pacific region, where multinational firms are searching for the best buildings in the priciest areas to situate head offices, Mansour said in a telephone interview.

“Those markets attracted corporate headquarters because of the labor available, and to diversify the risk of their labor pool,” she said.

Jakarta, Beijing

Jakarta had the second-biggest cost increase after downtown San Francisco, with a 28.7 percent gain to $54 a square foot, according to the brokerage. The San Francisco peninsula -- which includes Palo Alto, Menlo Park and Redwood City -- ranked third, up 28.6 percent to $62 a square foot. It was followed by suburban Seattle, which includes Bellevue, with a 21.8 percent jump to $38 a square foot; and Beijing’s Finance Street, which climbed 19.7 percent to $180 a square foot.

The costs take into account local variances in currency and lease terms, Mansour said.

In San Francisco, Salesforce (CRM)’s January rental agreement at 50 Fremont St., the city’s biggest leasing deal of 2012, helped spur a third year of occupancy gains, according to CBRE. The company, the largest maker of online customer-management software, took about 400,000 square feet (37,160 square meters) in the South of Market high-rise, at a cost of about $339 million over 18 years, according to a Jan. 6 regulatory filing.

Mozilla, Meraki

Other technology leases included Mozilla’s deal at Hills Plaza, on the waterfront, an area where rental agreements have been as high as $70 a square foot in the fourth quarter; and Meraki Inc.’s accord for 110,000 square feet in Mission Bay, where recent asking rents were about $60 a square foot, according to CBRE. Mozilla develops the Firefox Web browser, while Meraki makes tools to manage Wi-Fi networks and security.

San Francisco’s gains probably will slow in 2013, as will Asia-Pacific expansion that’s advanced “like gangbusters,” Mansour said. London’s status as a global financial hub should offset austerity measures in the U.K., she said.

“The tech sector is viewed as more favorable and more stable today,” Mansour said of San Francisco. “But growth will slow because there’s already saturation in the market.”

To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net

To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net

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