We're so happy to announce that The Registry, a Bay Area-based real estate news company, decided to use CompStak data today in a story about lease rent prices moving up in the SoMa district of San Francisco. Blake Toline and Noam Shahar, our awesome SF/Bay research team, did a great job investigating the market activity!

Feeding on Tech, SoMa Office Surges Ahead of North CBD

By Joe Gose

The quirky neighborhoods south of Market Street have coalesced to become the hottest office submarket in San Francisco, threatening to cast the North Financial District into the role of accomplished but doddering elder.

San Francisco SoMa The Registry real estateTechnology companies that need creative, collaborative space to woo talent have conferred the new status upon SoMa, which delivers the solution with its preponderance of converted brick-and-timber warehouses with windows that open. As a result, businesses and developers are increasingly focused on the area, generally bounded by U.S. 101, Mission Creek and San Francisco Bay.

Among other companies, RealPage, Yahoo! and Zoosk have moved from the North Financial District to SoMa over the past several months, increasing their footprint, according to CompStak, a New York-based startup that’s creating a marketplace for lease comparables. Tenants with sizable SoMa footprints include Square at 1455 Market St.Twitter at 1355 Market St. and PAC-12 Media Ventures at 370 Third St.

The effect of this demand has resulted in reduced concession packages that landlords are willing to offer. CompStak in its Effective Rent Report for the third quarter in San Francisco estimates that this figure has fallen by 50 basis points comparing Q3 of 2012 and Q3 of this year, from 6.2 percent of the deal value to 5.7 percent. Further, the report notes that the spread between asking and taking rents for the central business district has widened for the second consecutive quarter, while it has taken a different direction in sub-markets outside of it, like SoMa.

Some 3.5 million square feet of office space is under construction or renovation in SoMa, predominantly in the South Financial District northeast of 3rd and Harrison streets, according to Cushman & Wakefield. Of the 14 proposed new office developments, nine are slated for SoMa; only two have been proposed in the North Financial District.

“Developers for the most part have targeted SoMa because that’s where they see all the growth,” said Caroline Rooney, managing director of capital markets and Northern California research for Cushman & Wakefield.

Although the North Financial District has space available in its high-rise glass buildings, tech companies largely won’t consider them because they lack the openness that software engineers want to foster creativity, said Steve Barker, branch manager of San Francisco and Silicon Valley for tenant representation firm Studley.

“The San Francisco office market has flipped from its historical equilibrium,” he said. “SoMa is where all the tech companies want to be, and it’s extremely tight. It’s where all the new development is occurring, and rents are rising for the right reasons, though perhaps too quickly for the market’s own good.”

Barker is quick to point out that tech firms have yet to occupy roughly 3.5 million square feet that they’ve leased, most of which is in SoMa. Some of it, like Salesforce.com’s future home at 350 Mission St., is under construction. The rest exists but remains empty, reserved for future growth at today’s rents, he added.

Still, the emphasis on SoMa’s growth underscores a trend that has been underway for some time. Earlier this year San Francisco’s planning director noted that the North Financial District had 25 percent fewer jobs than it did 30 years ago. City planners anticipate continued accelerated job growth in SoMa neighborhoods as transportation projects like the Central Subway extension and Transbay Transit Center take root.

Many of the buildings under construction in SoMa also will feature more creative and collaborative open space, a concept toward which even non-tech office users are gravitating, Rooney said. In the South Financial District, Fortress Investment Group built out the 42nd floor at One Market into more collaborative space a couple of years ago, for example, and more recently, American Eagle Outfitters did the same on the 8th floor of 49 Stevenson.

The demand for SoMa space is making it a more expensive place to do business, however. According to Jones Lang LaSalle, the average asking annual rental rate of $57.19/square foot in the South Financial District in the third quarter represented a year-over-year hike of 9 percent. But in the surrounding SoMa submarkets to the west and south, the average asking rental rate spiked nearly 23 percent to $57.25/square foot over the same period. The average asking rental rate in the North Financial District climbed 12 percent to $57.96/square foot, Jones Lang reported.

Yet rent growth in the North Financial District could slow soon. Law and financial firms that historically kept the San Francisco office market upright during tough times are sitting on vast amounts of unnecessary space, Barker said, and they will consolidate into materially less square footage as leases expire over the next few years.

What’s more, the South Financial District rebounded from the most recent recession more quickly than its northern counterpart, said Amber Schiada, Jones Lang’s research manager for Northern California. That’s also a reversal of historical norms.

For those reasons, landlords in the North Financial District are trying to rehab the small floor plates in their high rises into creative space to lure tech companies. Those potential tenants are seeking nearly 2 million square feet of the 7 million square feet that companies in the market are hunting, according to Jones Lang.

In a few instances landlords with buildings on the southern edge of the district have succeeded in attracting SoMa tech tenants. Document productivity and workforce solutions firm Nitro PDF moved into 225 Bush St. a year ago, according to CompStak. The historic building, with its opening windows and high ceilings, is more likely to attract tenants looking for creative space, Barker said.

What’s more, earlier this year mobile security provider Lookout moved into One Front Street. There the landlord jettisoned the drop ceilings, Schiada added.

“It’s a little bit more difficult in a high rise to get the brick and timber feel or operable windows,” she said. “But we’ve seen some pretty cool build-outs.”