Commercial Market

Spotlight: California
San Francisco Office Market
The Golden state is a study in economic contrasts.
The bigger they are, the harder they fall. That old adage is apt to describe the
impact of the Great Recession on the nation’s most-populous state, California. Although Gov. Jerry Brown, campaigning for his fourth and final term as
governor, has touted a robust “California comeback” following the recession,
the reality is that the relatively slow growth of its economy and continuing
high unemployment rate are indicative of a state that’s not fully out of the
By Kurt Stephan
Although it’s home to some of the country’s hottest businesses and priciest areas to live, California also has one of the worst unemployment rates in
the U.S. and a poverty rate, 16 percent, well above the national average. The
state is a place of extreme geographic and economic contrasts. And all other
issues aside, California is weathering a collective crisis out of its control: an
extended drought that, while impacting certain industries and regions more
than others, is a worry to all.
The state’s gross domestic product (GDP), $2.2 trillion in 2013, makes it the
eighth-largest economy in the world, so even a slow-growing California has
enormous global impact. The state’s real GDP grew by 2 percent in 2013, on
par with its neighboring states and 20 percent greater than the national rate
of 1.8 percent. The above-average growth pales, however, when the state
with the country’s second-highest GDP, Texas, is growing at nearly double
California’s rate — 3.7 percent.
The third-quarter 2014 UCLA Anderson Forecast projects the sluggish
economic growth and decline in unemployment to continue through 2016.
The forecast predicts that state unemployment will drop to 5.7 percent by
the end of 2016. More encouragingly, it estimates that California’s personal
income will grow at a faster rate than the nation’s: 4.4 percent in 2015 and
4.6 percent in 2016.
Direct gross rental rate (per square foot)
Q3 2014
Direct vacancy rate
Source: Cushman & Wakefield
San Francisco office market
The San Francisco-Oakland-Fremont metro area enjoys a much healthier employment picture than most of the state, recording 5 percent unemployment in this past October. That, in combination with the thriving
tech sector, has created a red-hot San Francisco office market. According to Cushman & Wakefield, overall vacancy dropped to 8.3 percent in
third-quarter ’14, a 1 percent year-over-year decline. In the same period, direct asking rents increased 10.9 percent, to $59.12 per square foot per year.
The companies behind recent office-market transactions and future developments read like a who’s who of leading Web businesses. Among
other major deals in third-quarter ’14, Uber Technologies leased a
423,000-square-foot Class-A space on Third Street and Google leased
a 265,000-square-foot building at One Market Plaza. Many large downtown projects under construction are set to come online this year for
tenants such as, Dropbox and LinkedIn.
What the locals say
“Low inventory is affecting the multifamily marketplace right
now. For example, today there are only 82 available properties in San Diego County, compared to 400-plus normally.
This lack of inventory not only constrains purchase-money
transactions, but without a lot of exchange options, existing
owners are inclined to hold instead of sell, which is further
constricting inventory. It all adds up to create a highly competitive environment.”
Scot Cunningham
Vice president sales manager
multifamily division
AmericanWest Bank
Reprinted from Scotsman Guide Commercial Edition and, February 2015
All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Guide Media.
3 Cities to Watch
Focus: Drought
Three years of subpar annual rainfall have thrown the state into
drought conditions, with 2013 recording the least rain since
California’s statehood in 1850. California has historically been
drought-prone, with stretches from 1928 to 1934 and 1987 to 1992
being particularly severe.
The current drought is wreaking havoc in the heart of California’s rich
agricultural belt, the San Joaquin Valley, which in normal years is a
$17 billion annual industry that makes up less than 1 percent of U.S.
farmland but produces a quarter of the country’s food supply. The
Center for Watershed Sciences at the University of California, Davis,
estimates a total economic cost of $2.2 billion in 2014 because of
the drought in the valley, resulting in 17,100 lost jobs.
Despite these losses, the Business Forecasting Center at the University
of the Pacific projects that the drought will not stop the San Joaquin
Valley’s economic recovery, which is moving more slowly than
elsewhere in the state. A critical question remains, however: How
long will the drought last? Scientists warn that in the past 1,000 years,
California has endured several of what they call “megadroughts,” the
worst of which lasted 240 years.
San Diego
Point Loma Nazarene University forecasts that San Diego will lead
California in economic expansion in 2015, citing biotech, technology
and environmental science as hot industries that will help drive
growth to the tune of 35,000 new jobs for the year. The city is also
pushing to make its downtown more accessible to attract visitors and
businesses through a $31.1 million makeover of its waterfront area.
Rated the best city for young families in Southern California by, this Los Angeles metro area is a strong performer
economically. The Santa Ana-Anaheim-Irvine area’s unemployment
rate was 5 percent in October 2014 — well below the state and national rates. To augment its already-strong technology base, Irvine will see
the launch of a start-up incubator by the San Diego-based company
EvoNexus this year.
Unemployment Rates
Source: U.S. Department of Labor
California remains troubled by high unemployment. Its jobless rate of
7.3 percent this past October was a point and a half above the national
rate, and fifth-worst among all states. The gap is narrowing, however.
In 2011 and 2012, California’s unemployment rate was nearly three percentage points higher than the U.S. rate. California also had the nation’s
greatest month-over-month increase in jobs this past October, with
41,500 jobs added.
Forbes Magazine ranked the state’s capital No. 14 on its list of America’s
coolest cities for its entertainment and dining options, cultural mix and
more. Development abounds in the metro area, including a proposed
16-story multi-use tower adjacent to the future downtown arena being
built for the Sacramento Kings basketball team and an outlet mall in
Elk Grove, but the latter is facing legal challenges.
The University of the Pacific’s Business Forecasting Center expects
the jobless rate to dip below 7 percent in second-quarter 2015.
Sources: Business Forecasting Center, Cushman & Wakefield, Forbes Magazine, The Los
Angeles Times, The Nation,, Orange County Register, Sacramento Business
Journal, The Sacramento Bee, San Diego Union-Tribune, San Jose Mercury News, University
of the Pacific, U.S. Bureau of Economic Analysis, U.S. Department of Labor
Kurt Stephan was editor of Scotsman Guide Commercial Edition.
For questions on this article, e-mail [email protected]
Reprinted from Scotsman Guide Commercial Edition and, February 2015
All rights reserved. Third-party reproduction for redistribution is prohibited without contractual consent from Scotsman Guide Media.