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Which way are San
Francisco office
rents headed?

Two common predictors used to forecast office rents in San Francisco are quarterly change in occupancy rates vs the NASDAQ.

January 29, 2020

Perhaps the second biggest question I’m asked these days about the San Francisco office market is: are rents headed up, down or will they remain stable? (Just in case you are wondering, the first question I’m typically asked is whether construction costs are headed up, down or remaining stable.)

In either case, both are tough to predict but, as research analysts our job is to at least try. As a result, my team and I look around us to find clues in statistics we believe may correlate closely to, in this case, shifts in office rents. The trick is to find the data that correlates most closely to the underlying trend. Do actual rents rise and fall in unison with this other data? If so, can we use that correlation to forecast out three, six, nine months or a year ahead?

NASDAQ vs Occupancy

Two common predictors used to forecast office rents in San Francisco are the actual quarterly percentage change in occupancy rates in office buildings and the quarterly change in the value of the NASDAQ. Why NASDAQ and not the Dow Jones? San Francisco obviously has a high percentage of tech as well as venture capital-funded businesses and these types of companies tend to populate the NASDAQ. (Seattle has a high proportion of NASDAQ-listed companies too.)

So, an argument can, and has, been made that as the NASDAQ goes, so go office rents in markets like San Francisco. We decided to test it out.

I’ll spare you a lot of the ‘inside baseball’ because that’s just data scientists geeking out. Suffice to say we ran widely accepted statistical tests (see formula below) comparing occupancy rates and the value of the NASDAQ to office rent growth. We did this over three, six, nine, and twelve-month periods.

Occupancy over NASDAQ

In short, what we found was there was a stronger correlation (for the data geeks, a higher R2 score that is nearly 50 percent higher) between occupancy rate and rent growth than between the value of the NASDAQ and rent growth. This suggested to us that an increase in quarterly occupancy rate was more likely to result in an increase in quarterly rental rates than an increase in the NASDAQ.1

Now, what does that mean right here, right now? As I write, the NASDAQ is sitting an all-time high of 9,139 (January 27th). Just over three months ago, the index was at 7,768. Meanwhile, office occupancy in San Francisco has decreased marginally.

Which means...

This leads us to predict that asking rents will remain relatively stable, if not flat, through the second quarter of this year. Hopefully, this is news you can use but if you want to dig deeper into the analysis, feel free to reach out to me.

By the way, you could look at other data too. For example, VC funding for start-ups. Forty four percent of all VC funding in the United States last year was provided to start-up companies in the San Francisco Bay Area with more than half of that spending specifically headquartered in San Francisco. Since successful start-ups tend to grow quickly you might expect that they would have some kind of impact on occupancy and rents.

But that’s a computation for another day.

1One side note: JLL Research found that an average increase or decrease in NASDAQ values over a quarter had the strongest correlation with a change in San Francisco office rents nine months later (i.e. three quarters).

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