Market Insight Editorial & Advice to Tenants: 1Q1999

A Time to Reap, A Time to Crash

If you are contemplating negotiating a lease in or around San Francisco, don’t leave home without this information. Better yet, call us to walk you through our logic and assist you in creating a strategy to master plan your upcoming renewal or relocation. Confusion is still prevailing in local markets, as evidenced by (a) landlords continuing to maintain or accelerate asking rental rates in the face of an overwhelmingly obvious slowdown (see the chart below); (b) investment sales continuing at levels which will not be supported by our eroding demand base; (c) tenants over-reacting to hearsay in the marketplace, instead of doing their homework; and (d) plain inertia, on both sides of the negotiating table. The market has become accustomed to these heady rental levels. This is your wake-up call, if you haven’t tuned in to our previous Editorials!

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.

Several months ago we predicted that the wheels would fall off the San Francisco market. The trend toward negative absorption (negative growth) has continued, sending a powerful message to those tenants listening. Note from the chart above that the amount of “currently vacant space” has risen by 36% in the past six months. Scheduled vacancy for the period 12 months out has risen by a factor of 23%. In our 4th Quarter 1998 Editorial, we surveyed San Francisco for all parcels of 10-15,000 square feet available on one floor, within the following six months. There were 134 parcels in 58 different buildings. As of April 1st, there were 170 parcels available in 81 buildings. Is there any doubt that the market cannot sustain today’s rental levels in the face of current and projected vacancy?

Certain of our competitors have suggested that the multimedia and Internet community will keep the market afloat at current levels, or pressure rates even higher. These are interesting claims since we know that SOMA absorption is significantly negative. The loudest concession we hear from the landlord community is that the market has “flattened out”. The supply-demand chart above does not argue for a market in equilibrium, rather far from it. Perhaps we will see rates decline from the $50s to the $30s as quickly as they rose. Keep in mind that “market” is where people sign deals. Watch your wallet.


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. 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:

  • Comcast acquiring MediaOne Group. $60 billion
  • Air Touch Communications merging with Vodafone. $56 billion
  • BP Amoco Plc. acquiring ARCO. $25 billion
    Lucent Technologies acquiring Ascend Communications. $20 billion
  • Fleet Financial Group merging with BankBoston. $16 billion
  • Global Crossing Ltd. Acquiring Frontier Corp. $11.2 billion
  • Japan Tobacco acquiring RJR Nabisco Holdings. $8 billion
  • British American tobacco acquiring Rothmans International. $7.5 billion
  • Allied Waste acquiring Browning-Ferris Industries. $7.3 billion
  • Vivendi SA acquiring U.S. Filter Corp. $6.2 billion
  • New Century Energies merging with Northern States Power Co. $4.85 billion
  • Yahoo acquiring $4.4 billion
  • CIT Group acquiring Newcourt Credit Group. $4 billion
  • Adelphia acquiring Century Communications Corp. $3.6 billion
  • Yahoo acquiring GeoCities Inc. $3.56 billion
  • ACE acquiring CIGNA Corp. property/casualty unit. $3.45 billion
  • Intel acquiring Level One. $2.2 billion
  • Fortis AG acquiring American Bankers Insurance. $2.6 billion
  • CBS Corp. acquired King World Productions. $2.5 billion
  • USA Networks acquiring Lycos Inc.
  • Lucent Technologies acquiring Kenan Systems Corp. $1.4 billion
  • Adelphia acquiring Harron Communications Corp. $1.17 billion
  • Compaq acquiring $220 million
  • Viacom acquiring balance of Spelling Entertainment. $167.4 million


Advanced Micro Devices 300 jobs (2% of workforce)
Alcatel 12,000 jobs (10% of workforce)
America Online 350-500 (4% of AOL workforce)
America Online 500 jobs (20% of Netscape staff)
Bank of America 23,000 jobs (13% of global workforce)
Bankers Trust 5,500 jobs
Boeing Co. 6,700 additional jobs (28-38,000 for ’99)
Chevron Chemical 300 jobs (moving HQ from San Ramon to Houston)
Citigroup Inc. 10,400 jobs
First Union 5,850 jobs (7% of workforce)
Fluor Corp. 5,000 jobs
H.J. Heinz Co. 3-4,000 jobs, close or sell 15-20 factories
Hayes Corp. 250 jobs, closes operations
Ingram Micro Inc. 1,400 jobs
Kerr-McGee Corp. 530 jobs (12% of workforce)
Phillips Petroleum 1,400 jobs (8% of workforce)
Qualcomm 700 jobs (6% of workforce)
Sony Group 17,000 jobs (10% of workforce)
UCSF Stnfd. Healthcare 2,000 jobs (16% of workforce)
Wells Fargo/Norwest 4,600 jobs (5% of workforce)

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