Top Office Markets for Investment
PwC’s Real Estate Investor Survey for the first quarter projects San Francisco office buildings to increase in value at the highest rate during the next 12 months followed by Dallas, Manhattan, Houston and Los Angeles.
Today, Bloomberg is reporting that a fully leased office building in San Francisco’s SOMA district has sold for $719 per square foot. Rents are climbing in San Francisco, where growing technology firms are leasing space, causing office vacancies to fall. Meanwhile in Houston energy concerns are gobbling up office space as Oil & Gas companies expand due to healthy energy prices and promising long-term E&P opportunities in the Gulf and South Texas Eagle Ford Shale play.
A Canadian real estate firm recently paid $523 per square foot for the 845,000 square foot Hess Tower in downtown Houston, a record price per square foot for a major office tower in the energy capital of the world. The appetite from investors for trophy office towers has prompted Hines to put One and Two Shell Plaza on the market right after renewing Shell Oil’s 1.2 million square foot lease for 15 years.
San Francisco, Silicon Valley and Houston are among the hottest office markets in the country as technology and energy are driving new job growth. Those of you in my part of the world who are not technology geeks, the phrase “SoLoMo” is short for (social-local-mobile) which are considered the hot internet applications of today used primarily on smart phones. San Francisco is the center of the universe for the start-ups that are bringing these applications to the marketplace but is also home of cloud based software services giant SalesForce.
Placing Your Bet
I was thinking about these values from an investor perspective and was thinking would I want to place my bets on a commodity like oil & gas which is clear we are going to need for the next 40 years or a market driven to some degree by a bunch of technology start-ups developing internet applications we don’t necessarily need. Don’t get me wrong there is more to the dynamics of the San Francisco office market than just tech start-ups and I am a believer in the future of the internet economy.
Here is the thing, if energy prices drop significantly, I know that Shell and Hess can pay the rent but not so sure the start-up with the trendy mobile-app can if the funding runs out. Just something I would want to consider before dropping a quarter to half billion dollars on an office building. There will always be a select few start-ups that turn into household names, but I just can’t help but to think back a few years to the dot.com bubble.
I expect the Houston office market to get more national attention particularly after the first quarter office numbers are released. We don’ t have the cachet of San Francisco or New York but the media that covers CRE will figure it out eventually.