Real Estate Close-Up: San Francisco

Buoyed by the explosion in the biotechnology and "green" tech sectors as well as old standbys, vacancy in the city's central business district has fallen dramatically to about 9 percent at the end of last year from about 20 percent only three years earlier, according to Marcus & Millichap Real Estate Investment Services. That compares to a national office vacancy rate of almost 13 percent.

Office rent growth also has outpaced the national average the past two years, skyrocketing 19 percent last year and almost 15 percent in 2006, compared with national growth of 9 percent and 11 percent.

"The market has held up well in an environment where many businesses are watching and waiting to see what finally comes of the financial disturbances," said Tom Hart, executive vice president of office owner Shorenstein Properties LLC.

But as the U.S. economy teeters on the brink of recession, some cracks are starting to emerge in the San Francisco market.

About 850,000 square feet of so-called shadow space, or sublease space, has appeared on the market in the last two quarters, said Margaret Duskin, a senior director at real estate services firm Cushman & Wakefield Inc. Another 50 percent more is expected this quarter, a harbinger of a sluggish economy which could undermine rental growth this year.

"Professional firms are shedding excess space. Tech tenants have overcommitted and are either consolidating or releasing excess space," she said, also noting the bankrupt retailer Sharper Image and biometrics startup Pay By Touch together dumped 200,000 square feet on the market.

However, interest in downtown from the large Silicon Valley companies is helping to shore up vacancies too. Big tech players like Google Inc., Microsoft Inc., Facebook, and eBay Inc. have or looking to have satellite offices there to draw young people who want the urban lifestyle.

"The problem for these companies is human capital. It's very expensive to have offices in downtown, but they're finding it's a gigantic recruiting tool (to have offices there)," said Robert Gilley, a senior vice president at CB Richard Ellis Inc.

He called Google the "poster child" of the trend; the tech giant took 200,000 square feet in downtown, complete with food kiosks and ping pong tables.