San Francisco Market Update: Uneven Ground for Office Transactions in 2021

Office investment sales in the San Francisco-Peninsula market totaled $3.9 billion in 2021, roughly the same amount as the previous year, CommercialEdge data shows. Lingering uncertainties regarding the sector have had a deep impact in San Francisco, leading to a decline in prices and struggling vacancy. Sales activity remained significantly below the average recorded annually over the past five years—$4.7 billion.

Prices dropped across the board once the effects of the crisis were in full swing. After several quarters of growth, San Francisco’s average price per square foot reached $656 as of December, 43.1 percent lower year-over-year. The metro was the third most expensive to invest in, exceeded only by Brooklyn ($661 per square foot) and Manhattan ($1,253).

Despite a slower path to recovery, investors, developers, and office owners were confident in the market’s rebound, leading to some significant transactions taking place in 2021. A total of 8.4 million square feet, or 60 properties, traded across the San Francisco-Peninsula market.

Two of the largest office transactions occurred in urban submarkets. In Mission Bay, KKR closed on the market’s priciest acquisition of the year. The global investment firm paid $1.08 billion to Kilroy Realty Corp. for The Exchange on 16th, a 750,000-square-foot office building at 1800 Owens St. In 2017, Dropbox signed a 15-year agreement for the space—at the time the largest Class A office lease ever completed in San Francisco.

200 Mission reimagined. Image courtesy of Hines

Another high-profile deal was Hines Interests’ $800 million acquisition of the PG&E headquarters in the city’s Financial District. The utility company decided to sell the 1.4 million-square-foot building as part of its transition to Oakland. In September, the transaction was approved by the California Public Utilities Commission, also approving the return of roughly $400 million of the net gain to PG&E customers over a five-year period. In December, Hines unveiled its plans for the property’s future—the redevelopment of roughly 1.6 million square feet of office space and the addition of an 85-story multifamily tower, among other details.

The Bay Area—comprising the East and South Bay—market recorded the highest volume for office transactions among all metros tracked by CommercialEdge. In 2021, office sales generated $8 billion, 105 percent more year-over-year. Investments in tech and life sciences were responsible for a significant chunk of the volume. As opposed to the San Francisco-Peninsula region, prices per square foot in the Bay Area have risen by 17.0 percent year-over-year, to $516 as of December.

The market’s largest non-portfolio transaction occurred in Oakland, in March. Singapore-based Mapletree Investments paid $419 million for Uptown Station, a 404,922-square-foot office property at 1955 Broadway. CIM Group sold the 1920s landmark asset, which at the time was leased to fintech firm Square.

KKR also invested in the San Jose office market last year. In August, the company acquired HQ @ First for $535 million from Mori Trust Co. The three buildings comprise over 600,000 square feet and are occupied by Micron Technologies.

Other significant transactions included LinkedIn buying its Sunnyvale campus for $323 million from RREEF Property Trust, and ACG Equity Partners closing a $775 million, three-building portfolio deal, part of Coleman Highline, a 1.7 million-square-foot project developed by Sansome Partners and Hunter Properties.

The Bay Area market recorded 157 office sales in 2021 (including unpublished and portfolio deals), comprising over 17.8 million square feet.

CommercialEdge covers 8M+ property records in the United States. View the latest CommercialEdge national monthly office report here.