Office Vacancy Rate in S.F. Dips

This city’s office vacancy rate fell for the first time in two years in the third quarter as rents dropped far enough to lure law firms and insurance companies to rent more space.

With such tenants as Clifford Chance and Zurich Insurance signing leases, the vacancy rate fell to 21.5% from 21.7% in the second quarter. The average annual rent fell to $29.40 a square foot from a peak of $65.88 in 2000, according to property broker Cushman & Wakefield.

“For us, it’s been very busy,” said Allen Palmer, senior vice president of leasing for Boston Properties Inc.’s Embarcadero Center, known as the Rockefeller Center of the West. “Tenants have looked to upgrade their offices. There’s a lot of musical chairs in the city. We’re seeing tenants who want to move to less expensive space.”

The leasing may be an early sign of a rebound for San Francisco commercial property, after the Internet industry collapse sent vacancies in the financial district to an all-time high.

“We’ve seen some decent demand,” said Colin Yasukochi, research director at broker Grubb & Ellis Co. “It doesn’t mean the market’s going to turn around quickly.”

The vacancy rate may climb before it falls again, as 1 million square feet of new space is completed in the next few months, including two buildings at Foundry Square; the Ferry Building, which is being remodeled by Wilson/Cornerstone; and a building at Catellus Development Corp.’s Mission Bay project that was once intended as headquarters for Gap Inc.

For the vacancy rate to fall below 10%, indicating a market in equilibrium, about 8.5 million square feet has to be leased. That would require San Francisco to add 30,000 jobs, which may take six years, according to Cushman. In the last real estate slump, it took almost four years for rents to recover to the 1991 level.

The effects of the Internet collapse continued to ripple from the converted warehouses once leased by dot-com start-ups in the neighborhood south of Market Street to the financial district. The third-quarter vacancy rate of 22% for “Class A” space in the financial district is the highest ever, said a report by broker Julien J. Studley Inc.

“We’ve seen the dot-com fallout go through south of Market. It’s hitting the firms that were living off the tech-Internet industry--law firms, insurance and finance,” said Michael Pitre, a managing director at Studley.

Clifford Chance paid about $34 a square foot to lease 79,000 square feet at Equity Office Property Trust’s One Market Plaza. Commerce One Inc. and law firms Wilson, Sonsini, Goodrich & Rosati and Brobeck Phleger and Harrison paid about $100 a square foot two years ago in the same building.

Only top-tier space in the financial district commands more than $30 a square foot, while asking rents in most other areas are in the “very low $20s,” Studley’s report said.