Investor Update | Nareit REITWeek
June 2024
Positive U.S. Office Sector Trends Continue
Multiple positive occupier trends pointing to the potential for improved office leasing demand and more limited supply of high-quality product extending to HPP markets
Tenant | Gross | Gross | Development |
Requirements | Leasing Activity | Sublease Additions | Pipeline |
Increasing | Accelerating | Slowing | Shrinking |
+28% | +14% | -67% | -62% |
(1Q24 v. 1Q23) | (1Q24 v. 1Q23) | (Mar 2024 v. Dec 2022 Peak) | (2023 v. 2019) |
64% of CEOs Believe | Remote Share | Space Per | Placer.ai Data Points |
Hybrid Schedules | of LinkedIn Job | Employee Reached | to Higher In-Office |
Return to Pre-Pandemic | Postings Declining | All-Time Lows | Attendance than Kastle |
Attendance Frequency | -12%pts | -19% | +10% |
by 2026 | (Feb 2022 v. Dec 2023) | (Dec 2023 v. Dec 2010) | (As of 1Q24) |
Above Metrics Trending in Right Direction and/or Poised for Improvement
Note: JLL, 1Q24. | 2 |
Office Leasing Green Shoots in HPP Markets
HPP's markets are showing signs of stabilizing, such as increased or consistent tenant demand, declining or stable sublease vacancy, and diminishing new supply pipelines
Positive Market Trends - 1Q24 v. 4Q23 (Unless Otherwise Indicated)
W. Los | San | San | Silicon | Seattle | Vancouver | |
Francisco | ||||||
Angeles | Francisco | Valley | ||||
Peninsula | ||||||
Tenant | ||||||
3.2M Sq Ft | 6.4M Sq Ft | 2.3M Sq Ft | 5.6M Sq Ft | 1.8M Sq Ft | 450K Sq Ft | |
Demand | Increased | Increased to | Stable | Increased | Stable | Stable |
highest level | 30% | |||||
since 1Q20 | ||||||
Sublease | ||||||
2.9M Sq Ft | 8.9M Sq Ft | 3.0M Sq Ft | 5.6M Sq Ft | 3.9M Sq Ft | 670K Sq Ft | |
Availability | Decreased | Decreased by | Stable | Decreased by | Stable | Decreased by |
for 3rd | 400K sq ft | 500K sq ft | 75K sq ft | |||
consecutive | ||||||
quarter | ||||||
Under | 2.0% | 0% | 2.5% | 1.0% | 1.7% | 3.7% |
Construction | Decreased | Decreased - | Stable | Decreased | Decreased | Decreased |
as % of | ~130 bps | no new | ~290 bps | ~370 bps | ~260 bps | |
Inventory | YOY | supply | YOY | YOY | YOY | |
Note: CBRE, 1Q24. | 3 |
San Francisco's Revitalization Effort Underway
Mayor Breed's Roadmap to San Francisco's Future is yielding positive results, with the City showing progress and resiliency contrary to negative headlines
Public | New | Tourism | Shifting |
Safety Efforts | Businesses | ||
Rebounding | Political Landscape | ||
Delivering | Launching | ||
Crime reached lowest | Nearly 700 new | SFO domestic travel | Board of Supervisors |
level in 10 years | businesses registered | at 97% pre-pandemic | projected to shift to |
(excl. 2020 | per month in San | levels and hotel | more moderate |
shutdown), including | Francisco during | occupancy at 80% | majority in 2025 |
41% drop in property | 4Q23 - 200+ | pre-pandemic levels | elections (expected to |
crime, 23% drop in | businesses started in | focus on funding | |
violent crime (as of | downtown last year | police, tax / business | |
Feb 2024) | incentives) | ||
HPP Ferry Building
Highlights
+14%
Sales Increasing
(2023 v. 2022)
+1.2M
# Visitors Increasing
(2023 v. 2022)
Note: Sf.gov/roadmap. | 4 |
San Francisco AI Leasing on Pace for Another Strong Year
YTD AI companies leased 228K sq ft with another 825K sq ft of requirements currently in the market with Bay Area targeted AI VC funding continuing to fuel growth
Record 1.7M Sq Ft of San Francisco AI
Leasing Activity in 2023
Sq Ft | San Francisco AI Leasing Activity | ||||||||
1,800,000 | |||||||||
1,600,000 | |||||||||
1,400,000 | |||||||||
1,200,000 | |||||||||
1,000,000 | |||||||||
800,000 | |||||||||
600,000 | |||||||||
400,000 | |||||||||
200,000 | |||||||||
0 | |||||||||
2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | 2024 |
(YTD)
Bay Area Received 78% of ~$10B US AI
VC Funding in 1Q24
$ in
BillionsUS v. Bay Area AI VC Funding$25
$20
$15
$10
$5
54% 59% 66% 50% 61% 53% 57% 39% 50% 30% 78%
$0
1H19 2H19 1H20 2H20 1H21 2H21 1H22 2H22 1H23 2H23 1Q24
Bay Area AI Funding | US AI Funding | ||
Largest AI VC Funding Rounds 1Q24 - All Bay Area Located
Anthropic | $350B | San Francisco | Figure | $675M | Sunnyvale |
Lambda | $320M | San Jose | Freenome | $254M | S. San Francisco |
Applied Intuition | $250M | Mountain View | Glean | $200M | Palo Alto |
Celestial AI | $175M | Santa Clara | BioAge Labs | $150M | Richmond |
Note: CBRE, May 2024. | 5 |
HPP 2Q Leasing Activity Remains Strong
HPP is on track for another solid leasing quarter based on signed leases, as well as deals in- leases or LOI, with new deals now comprising the majority of activity
QTD Leasing Activity Status
1Q24 | Apr-May | Deals |
Executed | Executed | In-Leases or |
Leases | Leases | LOI |
Even After Apr-May Leasing Current Pipeline
Increased 10% to 2.0M Sq Ft v. 1Q241
Sq Ft | 1.8M |
2,500,000 | |
Sq Ft |
Total Leases | 509K | 305K | 414K |
Sq Ft | |||
% New | |||
58% | 83% | 65% | |
Leases | |||
2,000,000
1,500,000
1.5M Sq Ft
5-Yr Avg. Pipeline
+ | 814K sq ft of new / renewal leases signed year-to- |
date-already ahead of 1H23 total activity | |
+ | New deals as percent of year-to-date total activity |
trending well above avg. 41% signed last 8 quarters |
1,000,000 | ||
750K Sq Ft | 1.4M | |
500,000 | 5-Yr Avg. Tours | Sq Ft |
0
1Q19 | 2Q19 | 3Q19 | 4Q19 | 1Q20 | 2Q20 | 3Q20 | 4Q20 | 1Q21 | 2Q21 | 3Q21 | 4Q21 | 1Q22 | 2Q22 | 3Q22 | 4Q22 | 1Q23 | 2Q23 | 3Q23 | 4Q23 | 1Q24 |
Tour Sq Ft | Pipeline Sq Ft | |||||||||||||||||||
Activity on 45% of 1.2M Sq Ft of HPP's 2024 Expirations2
Lowest Level of Expirations in 3 Years - In Line with Historical Average
Only 1 Expiration >100K Sq Ft
Note: There can be no assurance that deals will be consummated at expected terms or at all. Square footage represents management's estimate of leasable square footage, which may be less or more | |
than the Building Owners and Managers Association (BOMA) rentable area and may change over time due to re-measurement or re-leasing. (1) HPP's pipeline comprised of deals in leases, LOIs or | 6 |
proposals. (2) HPP activity comprised of deals in leases, LOI, proposals and discussions. |
.
HPP's Success in Capturing Small Tenant Demand
At 411 First in Pioneer Square, HPP leveraged spec suites to capture a disproportionate share of leasing from small, high-qualitytenants-an ongoing strategy for other assets / markets
HPP Signed 91K Sq Ft of Leases Over 8 Quarters | ||||||||||
Taking 411 First from 57% to 93% Leased | ||||||||||
% | 411 First Lease Up 2Q22-1Q24 | |||||||||
Leased | Sq Ft | |||||||||
100.0% | 93.3% | 50,000 | ||||||||
+3,630 BPS | ||||||||||
90.0% | 40,000 | |||||||||
78.1% | 79.2% | 81.2% | ||||||||
80.0% | 30,000 | |||||||||
75.4% | ||||||||||
70.0% | 67.8% | 20,000 | ||||||||
60.0% | 57.0% | 58.8% | 10,000 | |||||||
+ 11 new leases with high-quality / credit national | ||||||||||
50.0% | 0 | tenants (avg. ~6K sq ft, 65% spec suites) | ||||||||
2Q22 | 3Q22 | 4Q22 | 1Q23 | 2Q23 | 3Q23 | 4Q23 | 1Q24 | + ~12K sq ft of new street-level restaurants / retail at | ||
Renewal Leases | New Leases | % Leased | 411 First and adjacent HPP assets |
HPP's Portfolio Comprises 19% of Pioneer Square Market
Yet HPP Signed 40% of Leases in that Market Since 2021
Note: Percent leased calculated as square footage under commenced and uncommenced leases as of 3/31/24 divided by total square feet. Square footage represents management's estimate of leasable | 7 |
square footage, which may be less or more than the Building Owners and Managers Association (BOMA) rentable area and may change over time due to re-measurement or re-leasing. | |
HPP Portfolio Aligns with Tenant Preferences
HPP has already invested capital to appropriately reposition most assets with the modern features and amenities essential to accelerate leasing in the current market climate
Office Rent Premium Associated with Different Amenities1
(Based on Class A in Same Submarket)
HPP Portfolio
Attributes & Amenities2
Roof Terrace or Sky Terrace Natural Light Courtyard w/ Outdoor Seating
Fittness Center w/ Shower Facilities LEED Certified Car Charging Station
Atrium w/ Reception
Dry Cleaners
Food Court or Hall
Day Care
Conferencing Facility
Fittness Center
Food Service or Restaurant
Banking or Convenience Store
5.2%
3.9%
3.5%
2.9%
2.8%
2.2%
1.6%
1.4%
1.4%
0.6%
0.5%
0.5%
0.1%
-0.1%
80% | 77% | 95% | 89% |
Class A as | Built or | Feature | Feature End-of- |
Determined | Substantially | Functional | Trip Facilities |
by CBRE | Renovated | Outdoor | with Bike |
2010 or | Space | Storage, | |
Thereafter | Showers, | ||
Lockers |
67% | 73% | 95% | 92% |
Feature | Feature | Feature EV | LEED |
Conference | Fitness | Charging | Certified |
Centers | Centers | Stations | |
(Multi-Tenant | (Multi-Tenant | ||
Only) | Only) |
-1% | 0% | 1% | 2% | 3% | 4% | 5% | 6% |
Notes: (1) JLL, March 2024. (2) Data as of 3/31/24 and reflects percentage of in-service office portfolio square footage (owned office properties, excluding repositioning, under construction, future | |
development and held for sale assets) and 100% ownership of consolidated and unconsolidated joint ventures. Square footage represents management's estimate of leasable square footage, which may | 8 |
be less or more than the Building Owners and Managers Association (BOMA) rentable area and may change over time due to re-measurement or re-leasing. Building age reflects management's | |
assessment of (re)development or renovation completion for in-service office portfolio. |
JLL Analysis Underscores HPP's High-Quality Portfolio
HPP engaged JLL to leverage its national tiering framework and create custom local-market tiering forecasts for each of HPP's assets and markets
Better Asset Quality
Tier 3-4 + Higher Quality Location | Tier 1-2 + Higher Quality Location |
Total: 17% or 2.5M Sq Ft | Total: 64% 9.3M Sq Ft |
(75% Tier 3) | (20% Tier 1) |
Location | ||||
Tier 3-4 + Low Quality Location | Tier 1-2 + Low Quality Location | |||
Better | ||||
Total: 17% or 2.4M Sq Ft | Total: 3% or 418K Sq Ft | |||
(93% Tier 3) | (100% Tier 2) | |||
84%
of HPP assets are top tier and / or in high-quality locations with potential upside as west coast office market fundamentals recover
(See Appendix for
further details on JLL
framework)
Note: JLL analysis reflects HPP in service, repositioning and under construction office portfolio (excludes only future development) and 100% ownership of consolidated and unconsolidated joint ventures | 9 |
as of 3/31/24. Square footage represents management's estimate of leasable square footage, which may be less or more than the Building Owners and Managers Association (BOMA) rentable area and | |
may change over time due to re-measurement or re-leasing. |
Studio-Related Union Negotiations Progressing
Productive negotiations continue with AMPTP regarding EO July contract expirations and IATSE/Teamsters have underscored their desire to not extend negotiations past that deadline
IATSE
Teamsters Local 399
Contract | Negotiations | ||
Membership | Expiration | ||
Status2 | |||
Date | |||
13 Hollywood locals | July 31, 2024 | + | Craft-specific agreements |
represent ~50K members | reached (Hollywood locals) | ||
and 23 locals outside Los | + | Area Standards Agreement | |
Angeles represent ~20K | |||
(locals outside Los Angeles) | |||
members-all behind the | |||
negotiations on pause until | |||
scenes workers in the | |||
"later in June" | |||
entertainment industry | |||
+ | Basic Agreement (Hollywood | ||
locals) negotiations restarted | |||
and scheduled to go through | |||
June 5 | |||
Represents ~6.4K | July 31, 2024 | + | Teamsters set to begin |
members in motion picture | negotiations on June 10 | ||
industry in California and | |||
New Mexico (e.g. animal | |||
handlers, casting, couriers, | |||
drivers, mechanics, | |||
warehousemen) | |||
On June 1, IATSE international president said in a statement, "I'm hopeful that we will soon reach a tentative agreement that members will want to ratify."
Note: Variety, 6/1/24 and IATSE, 6/124. | 10 |
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Disclaimer
Hudson Pacific Properties Inc. published this content on 03 June 2024 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 19 June 2024 18:13:04 UTC.