San Francisco to Pass New York as Top-Performing Office Market

San Francisco is set to displace New York as the best-performing office market in the U.S. this year as hiring by technology firms helps fill space, brokerage Marcus & Millichap Real Estate Investment Services projected.

The California city moved up five places to the top spot in the firm’s 2012 National Office Property Index, which ranked the country’s 44 largest office markets based on employment, vacancy, construction and rents. New York placed second and Houston third, Marcus & Millichap said in a report today.

“We’ve seen explosive growth in social media and electronic marketing, and it’s really benefiting some metro areas,” Hessam Nadji, San Francisco-based managing director of the firm, said in a telephone interview.

As the U.S. unemployment rate declines, office occupancies will pick up in metropolitan areas where technology, education, energy and health care dominate, Marcus & Millichap projected. The vacancy rate for U.S. office properties fell to 16 percent last year, the lowest level since June 2010, according to CBRE Group Inc. Before the recession, the rate hovered around 12 percent, data from the Los Angeles-based brokerage show.

Office construction hit a 15-year low in 2011, bringing little new space to the market, according to Marcus & Millichap. Employers are expected to absorb a net 50 million square feet (4.6 million square meters) this year, the brokerage said.

Las Vegas, Detroit and Cleveland -- areas with relatively weak job growth and high office vacancy rates -- are expected to show little improvement in occupancies, according to the report.

Asking rents for U.S. offices rents rose 1.6 percent in 2011 to about $28 a square foot, and may increase about 2 percent this year, Marcus & Millichap reported. There won’t be any “real rent growth” until vacancies fall to about 12 percent, Nadji said.

“Vacancies are still high and landlords don’t have any real pricing power yet,” he said. “We’re not going to see those rises until 2013 or 2014.”

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