Market Insight Editorial & Advice to Tenants: 3Q2000

Dot Meltdown: So Goes the Office Market

Only the press is pounding us harder than the stock market over this hot topic. The B2C sector, which invaded the City and built “Multimedia Gulch” into what it is today, is crumbling on virtually every front. Actually, “Multimedia Gulch” bled into ALL areas of San Francisco, not just the once-cheap SOMA areas. Nowadays we’re reading daily about failed companies and their new office space listings. The “dot-bomb” news almost distracts us from noticing that companies like PG&E, Bank of America, Chevron and Industrial Indemnity are giving up space, too. Someone should start tracking the small-to-medium sized law and other professional firms folding up shop in the City, since they can’t afford the rent. But nowhere is the blood flowing out faster than in dotland. Resumes are flying, for the first time in a very long time. Dots with pristine backing, who impressed the socks off most landlords with letters of credit and support from Wall Street’s best, are failing to deliver profitability alongside the stock options granted those landlords. The big ZERO is back: ZERO (actually, negative) growth in the office markets. See our San Francisco Bay Area Market Stats below.

Prepare to Dive. Market Growth? In the Hole.

Tenants want to know where the market is heading. “South” is the main theme of our response. But is this forecast newsworthy, since rates are falling from levels 40% higher than at year end ’99? The top of the market in San Francisco last year was ~$60/square foot/year. If the market crumbles as quickly as it rose in 2000, we could return to those 1999 levels within the next several months. But history tells us that landlords can be awfully slow to respond to declining markets. Let’s not forget that dot-coms posted huge letters of credit to secure their leases. These deposits are filling landlord’s coffers, so what have landlords really lost and how motivated will they be to disappoint lenders, partners and investors?

Net net growth of the Bay Area’s markets was downright lousy last quarter. In fact, for the first time in recent memory, San Francisco and Santa Clara Counties posted negative absorption of space. East Bay and San Mateo Counties had nothing to write home about either, although the most optimistic of stories remains the attractiveness of East Bay cities versus virtually everywhere else on the Bay. The markets are WORKING. Tenants are responding to choking economics by (a) moving to outlining areas; (b) retrenching and consolidating into less square footage; (c) deferring moves if at all possible; (d) expanding in new markets outside the Bay Area; (e) shutting down unprofitable office locations; and (f) firing chaff.

Asking Rental Rates? Gotta Quote? No??

Landlords’ asking rental rates have become as elusive as the Nasdaq’s bull run. On recent tours of space with clients, we’ve found that few landlords or listing brokers will bother to quote rental rates, since they’re uncertain what the market will bear—and don’t want to turn away seriously interested parties. It’s time to negotiate. This is something your tenant rep broker (yes, WE do this) will do for you. It’s time to probe between competing landlords to determine which of the group is most motivated to “buy” your tenancy.

How many landlords are chasing after your business? At this writing, San Francisco tenants had multiple options, available within the next six months, scattered around the City:

5,000 sq. ft. tenant: 179 alternative spaces
10,000 sq. ft. tenant: 139 alternatives
20,000 sq. ft. tenant: 72 alternatives
50,000 sq. ft. tenant: 15 alternatives
75,000 sq. ft. tenant: 5 alternatives

Landlords Pursue “Real” Credit

The train running through San Francisco during the past few years has been led by cash-rich, VC-backed Internet companies. Landlords got it all: Staggering rates. 12-18 month’s rent in the form of irrevocable letters of credit. Low or no tenant improvement credits. Stock options. Relatively cheap brokerage commissions (YES, most landlords are paying brokers the same fees when the markets are at $100/sf as they were at rents of $30/sf). NOW WHAT? We’re going back to the basics: History of profitability. Seasoned, long term Teflon management. Fortune 500 has a nice ring to it. Longevity. Appeal to investors. No stock in lieu. If you’ve got it, flaunt it.

Markets Keep Working: East Bay Continues to Suck Up

Tenants continue to “do the economic thing”, responding to extremely tight conditions throughout San Francisco, San Mateo and Santa Clara Counties. While net absorption of space in those areas has plummeted, activity has soared in the East Bay Region. All of this action bodes well for tenants in the City, eventually. Rental rate acceleration here has shut down demand big time. The message of the market is clear: Unless you’ve GOT to be leasing space, steer clear and come back another day.

San Francisco Bay Area Market Stats:

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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