Office Leasing – When Office Construction Begins to Make Sense

As a tenant representation specialist, I try to stay current on all of the commercial real estate trade publications. One story that recently caught my eye covered the recent sale of the Transbay Transit Tower Parcel in the SOMA District of San Francisco. Most of the coverage of the sale centered on the fact that, once completed, the Transbay Tower will be the seventh tallest building in the United States (surpassing the Chrysler Building in Manhattan) and the tallest building on the west coast (surpassing the US Bank Tower in Downtown Los Angeles).

Also worthy of mention was the sale price of $192,000,000. Yes, 192 million dollars for the site, the dirt, the potential resting place for the seventh tallest building in the United States (once its actually constructed)! If you don’t find this figure startling, consider that the parcel is a scant 1.14 acres. To put that in perspective, I’ll use the tried and true analogy that seems to everyone’s favorite when describing really big things: The football field. So, this parcel is the size of…ONE (1) football field (without the end zones!) At $192,000,000 that is nearly $4,000.00 per each square foot! Lets dig a little deeper into the San Francisco market dynamics to see how such a price could be justified.

As you may know, the San Francisco office market is among the hottest in the nation. Tech giants are gobbling up space with reckless abandon and traditional office tenants are scrambling to find lower cost alternatives. So if there is a place to pay a lot for a building site, San Francisco, or The City as the locals like to call it, would be that place.

Having recently represented a few tenants in San Francisco, I subscribe to office building data for all the major submarkets in the Bay Area. What I found was quite interesting. None of the class “A” buildings in the Financial District, South Financial District or SOMA (South of Market) submarkets are quoting rents. After speaking with a few colleagues in those markets they explained that the rents are increasing so fast that they are no longer quoting rents in any of the inventory databases. After some additional investigation, I learned that tenants leasing prime space in “trophy” buildings in one of these submarkets can expect to pay somewhere between $65.00 and $75.00 per square foot, per year. By comparison, tenants in The John Wayne Airport market are paying less than $30.00 per square foot, per year for the best buildings in the market.Soaring rents and extremely high demand start to paint the picture of how this site commanded such a princely sum.

Another factor that contributed to the lofty sale price are the entitlements that run with the site. The site is approved for 1.4 million square feet. So, if you haven’t already done the math, that’s over $137 per building foot. Then consider that it will likely cost another $300 per building foot ($420,000,000) to construct the core and shell of the building. Add to that another $75 per square foot for tenant improvements ($105,000,000) and you’re up to $717,000,000 or $512 per square foot. And that figure doesn’t consider site costs (grading, foundation structure, etc) as well as all of the consultants, and interest carry.

While that may seem like a lot of money, especially when compared to pricing in Orange County, lets take a look at the potential “finished value” of this project. In the simplest of terms, if the building rents for $70.00 per square foot, and the expenses (taxes, insurance, maintenance, etc…) are $20.00 per square foot, the net rent will be $50.00 per square foot. This would yield a NOI (net operating income) of $70,000,000 per year. ($50.00 x 1,400,000) After a slight deduction for vacancy (5%) at a capitalization rate of 6.5%, a value of $1,023,000,000 is indicated. That’s a hare over ONE BILLION DOLLARS if you weren’t paying attention.

While it is unlikely we will see this kind of pricing here in Orange County anytime soon, it does offer some perspective when we find ourselves pondering the rising cost of office space here in our market. If you have any questions about this post or anything else relating to office leasing, please feel free to contact Bill White directly at 949.721.8880 or

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