Faced with a possible downturn in the economy, tenants seeking space in San Francisco returned to the sidelines in the fourth quarter. 2007 saw a number of large deals take place including 200K for Google and 170K for O’Melveny & Myers. Rents also saw an uptick in 2007 overall, but that trend seemed to have stalled in the fourth quarter as tenants seemed to begin questioning whether the economy had the legs to support the demands of landlords.

As new landlords have moved into the San Francisco office market over the past few years, there has been a rapid push to raise rents and lower tenant improvements and concessions as the economy recovered and financial district vacancy dipped below 10%. Now that there is some doubt about the economy, tenants have pulled back until there is more visibility in the market while landlords are also seemingly on the sidelines about making concessions.

Uncertainty coupled with troubles facing the financial market has caused a significant slow down in demand for space in the financial district. There is approximately 1M square feet of new office development coming online in the city this year which has not been pre-leased. The additional supply, possible uptick in sublease space available could finally put the pressure on landlords in the second half of 2008.