July 25 (Bloomberg) -- Google Inc. agreed to expand its San Francisco office space at Morgan Stanley’s Hills Plaza building in what would be the city’s biggest lease transaction of 2013, according to a person with direct knowledge of the deal.
The planned 10-year lease for 350,000 square feet (32,500 square meters) will increase Google’s space at the waterfront location by 25 percent, said the person, who asked not to be named because the process is private. The Mountain View, California-based company will pay average rent of $65 a square foot, little changed from the rate in its current agreement, which expires in 2015, the person said.
Google, owner of the world’s most popular Internet search engine, is choosing to stay in its current building at a time when 2.8 million square feet of new office space is coming to San Francisco in the biggest construction boom since 2001. The company had been one of the largest tenants in the market for developers including Tishman Speyer Properties LP, Boston Properties Inc. and Shorenstein Properties LLC, which are building towers without lease commitments.
“If you’re an office developer, you’re racing to get all these new buildings leased up,” Steve Barker, San Francisco branch manager for Studley Inc., a tenant brokerage, said in a telephone interview. “The most important thing is to land the anchor tenant.”
Katelin Jabbari, a Google spokeswoman, declined to comment on the company’s lease plans. Wes Powell, managing director at Jones Lang LaSalle, the brokerage that represents Morgan Stanley, declined to comment.
Google was close to signing a letter of intent to occupy Tishman Speyer’s Foundry Square III, under way in the South of Market area, before backing out of the deal, three people with knowledge of the situation said. The 10-story building with 278,000 square feet of luxury offices is set to open this year.
Rick Matthews, a spokesman for Tishman Speyer, and Google’s Jabbari declined to comment on the technology company’s involvement with Foundry Square III. The New York-based developer is negotiating with several potential tenants, Matthews said.
San Francisco’s office leasing surge began in 2010, fueled by demand from technology companies. Prime downtown occupancy costs -- rents plus local taxes and service charges -- jumped 36 percent in the year ended Sept. 30, the biggest increase of any global market, CBRE Group Inc. said.
Leasing volume has since slowed, with deals plunging 45 percent this year through June compared with the first half of 2012, according to CBRE.
Google isn’t the only big tenant to forsake tower projects under way. Health insurer Kaiser Permanente chose to lease 264,000 square feet at offices being developed by Alexandria Real Estate Equities Inc., a Pasadena, California-based builder of biotechnology and medical properties, the company said.
Bank of America Corp. and Delta Dental of California, seeking a combined 350,000 square feet as each company nears the end of current lease terms, may renew those deals rather than relocate to new high-rise space, according to a person with knowledge of the assessments made by the tenants.
San Francisco office vacancy fell to 7.2 percent in the second quarter from 7.5 percent at the end of March, according to a Cornish & Carey Commercial Newmark Knight Frank report. Asking rents rose 1.2 percent to an average of $54.59 a square foot, the smallest increase since 2010, the brokerage said. Illumina Inc. signed a lease for 97,700 square feet in Mission Bay, near the Kaiser site, in the biggest deal of the period.
Shorenstein’s 1 Tenth project, with 338,000-square-feet in the same complex as Twitter Inc.’s headquarters, is set to open next year and is being marketed to prospective tenants, said Andrew Neilly, a spokesman. Boston Properties’ 535 Mission, a South of Market tower with 307,000 square feet, also scheduled for 2014, will suit a variety of tenants, according to President Doug Linde.
“We anticipate that it’s really going to be leased to a broad range of small or medium-sized technology and legal and financial services and other tenants,” Linde said on a May 1 earnings conference call.
Bob Pester, senior vice president locally for the Boston-based landlord, didn’t respond to a call seeking an update on lease negotiations in that project.
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