Market Insight Editorial & Advice to Tenants: 2Q2001

Calling all Tenants: Smell the Vacancy, Up 50%

We’re not surprised. Bay Area vacancies have soared to 27 million square feet, up 50% from Q1, 2001 (recall that Q1 vacancies were 215% higher than Q4, ’00). Scheduled vacancies, 12 months from now, soared to 42 million square feet, up 26% from Q1. Are these stats boring, or is this not a WAKE-UP CALL TO ALL TENANTS!! Demand rates are so abysmal that the markets are quickly working to lure shoppers into the spot (NOW) market. While most businesses in the area are focusing on damage control, short term planning and a quick return to some form of profitability, the office markets have gone begging for activity. Dramatically lower rental rates and tenant improvement allowances are back! Landlords facing many months of prospective vacancy have become highly motivated to “buy” tenants…and brokers.

Net absorption of space around the Bay was horrid, as expected. San Francisco, ground zero for Internet-related pain, suffered the greatest of Bay counties, at negative growth of -700,000 square feet. There will be no market recovery this year, nor likely into mid-2002. Period. “Sorry about that”, shall we say, to the landlord community. OPPORTUNITY KNOCKS, tenants. Smell the coffee. Strike that. Smell the vacancy, and get ready to hire us on to position your company to capitalize on a restructured renewal or an aggressive relocation transaction.

Rental Rates in Rapid Decline. When “$50” means $30

In spite of the great job being done by the Press, most tenants are unaware of the speed at which change is taking place, and the magnitude of the move in rental rates. Those tenants who were caught in the firefighting during the last 18 months, however, do recall that landlords raised the ante literally every day. The same can be said of the current market, in rental rate reverse. With millions of square feet coming online recently, most landlords and sublessors are at a loss to even pose an asking rate. We are seeing some deals being made in the $30s, where asking rates for those spaces were in the $50s. To translate, we believe that space marketed at anything north of $60 cannot be worth more than $55-$60/sf/year, including top-of-the-market space with nosebleed asking rates in the $80-$90/sf range. Space marketed in the $40 range will likely lease in the $25-$30/sf/ range. Sub $30 space will probably land in the $teens. Nothing of size is leasing quickly; bear that in mind. Your early tenancy will save a lot of blood.

A summary of the posted rates is reflected in the following chart—with an interesting hypothesis: If vacancy rates, today, are similar or greater than they were in Q2, 1998, WHY ARE ASKING RATES TODAY SO DRAMATICALLY HIGHER THAN BACK IN 1998?

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 San Francisco, current asking rates are almost $13/sf/year higher than they were back in ’98! This should not be the case, and the markets are changing daily to make the appropriate adjustments. In fact, one could and should argue that vacancies today are held in much weaker hands than in ’98.

Tenants, some brokers and landlords have become accustomed to rental rates north of $30/sf/year. This shopper’s mentality will change quickly, as brokers educate their clients about current dynamics, and push harder to negotiate (and win…) more favorable terms. Landlords, however, will tend to react more slowly—especially institutional ownership. If we are given an opportunity to meet and represent you, we will craft and execute an appropriate strategy to capitalize on this softening marketplace. Let’s get together.

Are 500 Blocks of Space too Many to Chose From?

We are not trying to be flippant, but rather to drive home the cold fact that there ARE over 500 blocks of space to accommodate a 5-10,000 square foot tenant in the Bay Area, right now. Vacant and ready to occupy. In San Francisco, you’ll find 202 of the 500. Searching for 10-20,000 square feet? In the City you’ll find 173 alternatives. There are 67 alternatives, should you need 20-40,000 square feet. We’re available to meet with you to share all the details about these availabilities, OR you can visit the “Take Action” section of our website fill out the form and we’ll email a complete and custom survey to you.

Advice to Tenants: Dust Off Your Lease and Call Us.

This is not a time to be reserved about your leasing situation. It’s a time to be creative and VERY aggressive. Since the business environment is particularly queasy, the leasing process should begin with some thoughtful and conservative planning to confirm a reasonable foundation for a new lease, and carefully crafted expansion options. Contrary to those times in a tight market, you should consider (once again; we’ve been here before) leasing just-in-time space, with controlled expansion space carried by the landlord at the landlord’s cost and expense.

If your lease expires anytime in 2002; OR if you have a lease into 2003/4 with extenuating circumstances (survival has become an issue; your space is far too large or small; your requirement would exceed 20,000 square feet, etc.), pull out your leasing file and give us a call. You are NOT too early to begin addressing your needs. In fact, the market is telling you to gear up now and make it worth your while. Yes, landlords want to reap the benefit of existing cash flows, and so may be reluctant to make concessions for existing tenants—BUT they are also compelled to yield to good credit tenants who can assure them of sustained profitability and avoidance of extended vacancy. Make hay while the sun shines. Get out your shades, and give us a call.

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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