Market Insight Editorial & Advice to Tenants: 3Q1999

Record Absorption of “Immediate” Space

We were beginning to wonder when the enormous collection of leasing deals would be reported and reflected in the stats. Don’t look any further. The Q3 figures are HOT. As you can see from the chart below (our “Balance Sheet” for office space in the San Francisco Bay Area), net absorption of space skyrocketed—with the greatest concentration of leasing in the “spot” market for vacant space.

As you can see from the figures below, San Francisco’s net absorption rate during Q3 was HUGE, at 933,000 square feet. Our Bay Area total for the quarter was a whopping 2.23 million square feet. While the pace of leasing has not been consistent through the year, the pace is just this side of light speed at the moment. The existing blocks of space available “now” are being sought after, in each case, by multiple tenants. Traffic does not appear to be discouraged by the stratospheric rates, yet. It is interesting to note, though, some of the tenants bailing out of San Francisco, early retirements and retreats to home-officing and hoteling. Make no mistake: demand is VERY strong.

Keeping Up With the Pace When You HAVE to Lease Space

The entire leasing process has to be compressed well beyond the “norm” of yesteryears. Build your team quickly (broker, architect/space planner, contractor, real estate lawyer); identify your requirement (through space programming with your architect); align yourselves with a broker (yes, like Mihalovich Partners) who can produce up-to-today’s space available info; prepare the last two year’s audited financials for the shortlisted landlords to review (start-ups and young companies will need to have a business plan at the ready, as well as financial projections); prepare bank and trade references (start-ups and young companies should be prepared to introduce VC and other key financial Partners); and try to avoid time-consuming exchanges of several rounds of proposals and counter-proposals. Best yet, make the landlord’s decision-making process as irresistibly easy as possible. After exchanging one round of proposals, reduce the outstanding issues to a manageable list and try to schedule an all-hands-on-deck meeting to conclude an agreement on general business terms. Agree to a specific schedule for deal completion and be prepared to document every accolade you’ve espoused about your company. If you delay, your deal dies.

Spot Supplies Down 18% in the San Francisco Bay Area

We are experiencing a classic “inverted market”. Spot demand for space has been so severe, that in spite of supplies coming to market in future months, one likely has to pay more for space today than for a future commitment to space. We experienced quite opposite conditions during the 1980s, with a “carrying charge market”, when the spot market was so soft that landlords literally paid tenants to enter the marketplace early (with lease assumptions, payment of relocation expenses, signing bonuses, etc.). The “message” of today’s market for tenants is to delay or shift demand to later months or years. The “message” for developers: build, build, build.

Upcoming Supply Still Hanging at 25 Million Square Feet

You’ll notice from our previous Editorials that we keep a running tally on Bay Areawide space scheduled to be vacant within the next 12 months. During Q3, this figure declined only 1% (recall from above that spot supplies declined by 18%). Until Q3’s record absorption, the supplies available within 12 months appeared completely daunting. Can companies continue soaking up space at these heady levels? Can this be a new trend? Never say “never”, but we are confident that the markets will “work” to bring about a more equitable balance between supply and demand. The question is, what do you do if you’ve got to renew your lease now, or take down new space?

Start-Ups and Other Tenants: What Should You Do?!

Please call us; we can help you to develop a strategy and execute.

Remember that the markets are extremely dynamic. They’re not dead. We create opportunities for our clients. Some tenants are folding up shop rather than facing renewals at 100% rent increases. Other tenants will “sell out”, sublease/assign or terminate their leases, cash in on the profits and scatter to the winds. If there are businesses that can’t afford to pay upwards of $45/sf for space (yes, there are plenty), this market will weed them out and new opportunities will arise. Let’s talk about it.

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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