Market Insight Editorial & Advice to Tenants: 1Q1998

For the first time since our Bay Area markets started their rocketing rental rates, there are signs that the overheating is beginning to cool: We have negative absorption during the first quarter of 1998, in San Francisco, the Peninsula, Silicon Valley office and Oakland. Only the Contra Costa market showed positive absorption so far this year. Here seems to be proof that the markets are working. Markets always try to tell us something. During the past several months of stratospheric rises in rates, the markets have been telling tenants to shut it off; take your requirements elsewhere; send people home to do their work; lease space in the heretofore off-beat locations in town; leave the county…anything but lease more space in our core areas. When tenants don’t get the message, or can’t help but pursue space where their employees and/or clients require them to be—rates continue to rise, often daily.

Obviously developers have gotten the message, too. In 1999 we expect to see the following new supply of space:

 215 Fremont    260,000 sf  Equity Office
                              Properties Trust
 640 Battery    225,000 sf  The Martin Group
 475 Brannan    255,000 sf  Stein Kingsley Stein
 410 Townsend   100,000 sf  Rosenberg
 625 Second     140,000 sf  Rosenberg

In 2000 we are expecting:

 101 Second      357,000 sf  Myers/Cousins
 243 Sacramento   60,000 sf  Patson Development
 One Market      350,000 sf  The Martin Group
 199 Fremont     385,000 sf  Fremont Group

Shortly thereafter:

 150 California  215,000 sf  Equity Office/Beacon
 The Gap Bldg.   450,000 sf  The Gap

This list does not include a myriad of smaller renovation projects and other major blocks of space currently or coming on the market in existing buildings, such as:


 Levi's Plaza         100,000 sf+
 201 Third St.        160,000 sf
 Pacific Center II    207,000 sf
 1145 Market           75,000 sf
 1355 Market          118,000 sf
 111 Sutter           240,000 sf
 1155 Market           75,000 sf
 235 Montgomery       150,000 sf
 Marathon Plaza       250,000 sf
 444 Market            85,000 sf
 One Market Plaza      80,000 sf
 One Montgomery       175,000 sf

Does one quarter of negative absorption create a trend in that direction? Hardly, although landlords should begin paying attention to the meteoric rise of rates over such a short period of time and consider getting realistic about locking in some incredible returns at these levels. The fact is that the volume of transactions taking place at these levels—as one would expect—is unimpressive.

Merger Mania:

Out of this trend we should expect to see major consolidation of space in many metropolitan areas. Where and to what magnitude? As discussed in last issue’s News, the stock markets obviously love this game: Larger market coverage, coupled with domination of the consumer market, coupled with reductions in the workforce to enhance shareholder value. This recipe plays well to the investment community; however, this trend should also give rise to concern in the landlord and real estate investment community about stability in our tenant base. What will become of our most creditworthy tenant base?

The mega-mergers: Travelers/Citicorp. NationsBank/Bank of America. WorldCom/MCI. Bank One/First Chicago NBD. Bell Atlantic/Nynex. Stay tuned, there will be more announcements on a regular basis for quite some time. Keep a watch on the layoff announcements.


We couldn’t help but notice a few announcements, so far this year:

Xerox         9,000 jobs  Closing plants to save
                           $1 billion/year
Cypress Semi.   100 jobs  Closing 3 plants
Intel         3,000 jobs  Weak demand
GTE          1,500+ jobs  Cutting costs by $500 
                           million over two years

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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