Market Insight Editorial & Advice to Tenants: 3Q1997

For the first time in 15 years the commercial real estate markets have taken on many of the characteristics of the stock market: (1) Office leasing transactions are coming together very quickly, due to overheated markets; (2) Brokers and their clients are better prepared than ever with market knowledge and the willingness to make timely commitments to space they find attractive; (3) the level of efficiency in the deal-making process has risen dramatically; and (4) the financially strong, better informed tenants thrive.

Vacancy rates, tenant-concessions and the gestation period for deal-making are all under pressure around the Bay Area, notably evidenced in our San Francisco and Silicon Valley Market Reports. Leasing Class A space in San Francisco often involves multiple offers. Tenants are under pressure to originate more dollars for rent and tenant improvements than many listing brokers anticipate.

The result?

  • Many tenants are planning to do less with hard construction than in prior years, especially considering the rising cost of construction. Many general contractors are too busy to bid, at least competitively, on some significant assignments.
  • Tenants are getting creative, looking into outlying suburban areas for opportunities where the markets are not so overheated.
  • Buildings under construction and planned are influencing long term thinking. Potentially dramatic supply levels are going to be available in the short term. The rising rates have “priced into production” sizable renovation projects, long-dormant lots and heavy build-to-suit activity.
  • Tenant consolidations. As long as companies are having to devote dramatically greater percentages of revenue to rent than in prior leases, tenants will strive to reduce square footage, emphasize telecommuting where appropriate, and create more democratic spaces which more efficiently serve the general populous than endear the individual.
  • In 1998/1999/2000, if your lease rates move from $25/sf/year to $40/sf/year, what will YOU do? Plan ahead. Consider the issues. Abstract your lease and begin to create a decision timeline and path to resolution. Surround yourself with experts.

Some of the more notable leasing activity included Gap’s takedown of 200,000 square feet at Hills Plaza. This transaction displaced Pillsbury, Madison & Sutro’s deal on the same space, but landed them instead at 50 Fremont Street. PM&S will leave behind substantial pockets of space at 235 Montgomery Street (the Russ Building), 225 Bush Street (former Chevron HQ) and 114 Sansome Street (the Adam Grant Building). The Pacific Exchange appears to have landed a development site SOMA, which will house some 375,000 square feet of Exchange functions and member firms. Pacific Exchange will vacate 100,000 square feet at 220 Montgomery Street (the Mills Building) upon completion of its build-to-suit in 2000. Shaklee Corporation is underway in its development of a campus in Pleasanton and will leave behind 140,000 square feet at 444 Market Street in 1999. 444, soon to be renamed 1 Front Street, is already receiving unsolicited offers to lease that space.

Investment activity has also been remarkable. Rising markets have driven many an owner to cash in. Unsolicited offers and multiple bidders are commonplace. During the past 12 months there has been major turnover in large office projects throughout the Bay Area. Highlights of these transactions include:

San Francisco:

One California Street 530,000 sf
One Maritime Plaza 450,000 sf
444 Market Street 600,000 sf
595 Market Street 385,000 sf
201 Mission Street 470,000 sf
44 Montgomery Street 635,000 sf
100 Pine Street 300,000 sf
One Post Street (50%) 390,000 sf
160 Spear Street 260,000 sf

Embarcadero Center (Prudential’s 50% interest) is being marketed by Lehman Brothers. China Basin and 120 Montgomery Street should also close soon. 301 Howard Street may trade.

Silicon Valley/South Bay:

Cupertino Center I 160,000 sf
Palo Alto Place 60,000 sf
Metro Plaza I, II & III 415,000 sf
1740 Technology Dr. 205,000 sf


Watergate Towers & Plz. 999,000 sf
Oakland City Center 228,000 sf

Please note: We provide Bay Area market data and analyses for the current year only. To request commercial real estate market data for previous quarters, please contact us.

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