Inside San Francisco’s office market: Developers win “beauty contests” and lease entire buildings within months

Office developers in San Francisco are finding they can lease the majority of their office properties well before they break ground, and in some cases, before they even get permits to build.

The trend is a product of high demand from growing tech companies and a citywide annual cap on office development, according to the Wall Street Journal.

Since 1986, the city has restricted new office development to 875,000 square feet each year. That isn’t much space — John Buck Company’s 43-story Park Tower at Transbay project is just 100,000 square feet under that cap. Facebook leased the entirety of the project last year.

Square footage that goes undeveloped is banked for future years, but the surplus has shrunk amid the city’s development boom. City officials decide which projects qualify each year with a so-called “beauty contest.”

Tech firms are in fierce competition to lease large amounts of space in San Francisco, where vacancy sits at 6.4 percent, and many commit before a project qualifies under the program. Demand from tech company employees is also squeezing the housing market in San Francisco.

Earlier this year, Pinterest.com leased 490,000 square feet at an Alexandria Real Estate Equities project that hasn’t received approval under Measure M. Salesforce.com leased 325,000 square feet at a Hines project last fall that hasn’t received approvals under Measure M.

That dynamic is good for developers, unless an economic downturn in the near future forces tech companies to pull back and put large amounts of space on the market for sublease, analysts say. [WSJ] – Dennis Lynch