Market Insight Editorial & Advice to Tenants: 3Q1998
The broad markets are beginning to take a pounding, not only from the press. In the face of tightening capital for new acquisitions and renovations, the pending demise of the CMBS markets and a retreating demand base, some REITs and other landlords are arguing that rental rates will continue their climb and that returns to investors will maintain their proverbial smiles. Perhaps we need to see the press enlighten us further about the attempted Japanese bailout. Keep your fingers crossed. The S&L crisis is not long forgotten. We noted Brazil’s $80 billion plan to return to prosperity…
We are not optimistic for the plight of investors. We need only look into one of the healthiest economies in the country to see the beginning of a new trend. The San Francisco Bay Area economic “wheels” are coming loose. The Third Quarter and accompanying statistics are quite revealing: We are back to “negative absorption” and market supplies that already dwarf anticipated tenant demand. Let’s take a look:
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.
In each of these significant markets, existing vacancy will weigh heavily on rental rates, not to mention the future impact of already scheduled vacancies. Scheduled vacancies include spaces which are already “on the market”, but simply not yet vacant, as well as renovations and new construction already in progress but undeliverable until later in the 12-month statistical period. Can these figures be construed to be positive (or even neutral) for growth in rental values for the San Francisco Bay Area? We think not.
BEATING THE DRUMS
Landlords have done incredibly well and had their way with some of our best in San Francisco. The market, performing its function properly, has held less volume of transactions than expected, but nevertheless produced among others the following list of members of the $50 Club—those paying over $50 per square foot per year for their leased premises:
Stuart Foundation, 50 California
Morgan Stanley, 555 California
Lehman Brothers, 555 California
Horizon Holdings, Three Embarcadero Center
Morrison & Foerster, 425 Market
Charles Schwab, Telesis Tower
NationsBank/Montgomery Securities, Telesis Tower
Client Preservation, 44 Montgomery
Hosie Wes, 250 Montgomery
Marakam Associates, 456 Montgomery
AES Energy, 100 Pine
Enterprise Solutions, 235 Pine
Duane Morris, 100 Spear
ADVANCE, RETREAT, CONSOLIDATE, NEGOTIATE, WHAT?
The markets have become murky, at best, for the landlord and investment community. If you are part of the tenant community, we think that you should be focusing very aggressively on evaluating your immediate and short-term needs with the able assistance of professional space planners. Don’t try this on your own. Assuming that you have immediate needs, space planners will help you identify a wide variety of potential solutions—some of which would never occur to you—at a time when you will absolutely need to be creative. As rental markets begin to retreat, many landlords (and many can) will be unresponsive until forced by changing dynamics. Be prepared with short-term alternatives, or face the consequences at the negotiating table. If you have not done your homework in this marketplace, your livelihood is at risk.
Amidst tight markets, thoughtful strategic planning asks, “What do we need?”, versus “What do we want?” The expansion space you want to carry, at $40+ per square foot, may bury the company. Borrowing, or leveraging VC capital, to construct improvements that immediately belong to the landlord may prove fatal. How can we negotiate with the management and staff, internally, to be more flexible spatially for the long term good of the group? Perhaps a tenant-team contractor may assist you in a creative assessment of options presented by your space planner. If you spend $2-3 per square foot for these types of analyses, its decision-assisting value is exponentially greater. If you would appreciate our opinion, please let us know.
MERGER MANIA, CORPORATE LAYOFFS, DISSAPPEARING ACTS, CONT.
We have been discussing in previous Editorials, the contrasting objectives of Board officers and investors; and the general workforce. Wall Street typically applauds belt-tightening measures and other “savings” (layoffs), while the workforce simply takes it in the gut. Occasionally we read about the demise of an Al Dunlap. Sorry, Al. M&A, restructurings, layoffs, consolidations and other synonyms seem rarely to lead to higher real estate valuations.
A few of the recently announced, more significant events follow:
David Coulter, RIP
Boston Chicken filed Chapter 11; $283 million in debt.; closing 15% of
stores
McKesson buying HBO & Co. ($14.1 billion)
Newell Co. buying Rubbermaid ($5.8 billion)
Kerr-McGee merging with Oryx Energy ($1.86 billion)
Veritas Software buying Seagate Technology subsidiary ($1.6 billion)
Alza Corp. buying Sequus Pharmaceuticals ($580 million)
Laidlaw, Inc. buying Greyhound Lines ($470 million)
Bertelsmann bought 50% of barnesandnoble.com ($200 million)
Intel Corp. buying Shiva Corp. ($185 million)
First Security buying Van Kasper & Co. ($100 million)
Lycos bought Wired Digital ($83 million)
Symantec bought Quarterdeck Corp. ($65 million)
Perkins Coie merged with Hosie, Wes, Sacks & Brelsford
Fisher & Hurst, San Francisco, dissolved after 50 years
Casualties:
| ARCO | 900 jobs (4.5% of workforce) |
| BankBoston Corp. | 100+ jobs |
| Calif. Federal Bank | 1,125 jobs (15% of workforce); closing 56 branches |
| Digital Microwave | 200 jobs (20% of workforce) |
| Hewlett Packard | 2,500 jobs (2% of workforce); “voluntary severance” |
| International Paper | 1,500 jobs (2% of workforce) |
| LSI Logic Corp. | 1,200 jobs (17% of workforce); closing several plants |
| Merrill Lynch | 3,400 jobs (5% of workforce); plus 900 full-time consultants |
| Metropolitan Life | 1,900 jobs (10% of workforce) |
| National Semi | 600 jobs; partial plant closure |
| Packard Bell | 1,000 jobs (20% of U.S. workforce) |
| Pratt & Whitney | 2,000 jobs (6% of workforce) |
| Raytheon Co. | 14,000 jobs (16% of the Raytheon Systems workforce) |
| Washington Mutual | 3,000-3,500 jobs in CA; closing 161 branches |
| Ziff-Davis | 350 jobs (10% of workforce); cutting 3 publications |
