The New York Times today published an article outlining not only the dramatic turnover of San Francisco office buildings but the disconnect between current rental rates and prices recently paid for office buildings.

According to the article, it is estimated that 75% of San Francisco’s higher end office space has changed hands since the beginning of 2006. During this time prices have seen a dramatic rise from virtually all previous prices. An example is 650 California Street which was recently sold for $610 per square feet. In 2004 this building was sold for $350 per square foot.

While rents have moved up markedly they are still generally a ways off from the price points needed to justify many of the sales prices which were recently recorded. In fact, many purchasers have recently been assigning a higher value to vacant space than occupied space under the belief that rents will continue their rapid rate of increase.

Our belief is that many landlord’s have gotten ahead of themselves and we urge tenant’s to proceed with some caution in some markets. While San Francisco and Silicon Valley are fundamentally strong markets, resurging commercial construction coupled with a potential slowdown in consumer spending might once again exert downard pressure on rents.

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