Market Insight Editorial & Advice to Tenants: 3Q2004

Editorial from Dan Mihalovich, Principal of Mihalovich Partners and Founder of The Space Place®

Report Card, Economy: F

Intractable Bush & Greenspan

Riding on their assertions that the economy is growing and that inflation must be controlled, the Fed continues to raise interest rates. However, reality is that, instead, the economy is sputtering, oil prices are sizzling and employment is lagging. Can we possibly be in a “soft patch” with a $500 billion Fed deficit; a $500 billion trade deficit; and a $200 billion, growing price-tag for the War On Terror? It would appear that the Gov’s fogged eyeshades will tip us back into recession. A Fed funds rate of 1.5%…record low rates going back 40 years…Is that supposed to indicate a strong economy?

Interest rates at 40-year lows. Why? Most noted by the Feds: Keep a mindful eye on the evils of inflation. But if the Feds calculated inflation properly, the resulting rise in interest rates would promptly put the economy into recession. We can’t have that, now can we? So, the Feds measure inflation to suit their agenda. Did you think the CPI (aka cost-of-living index) accurately reflects the skyrocketing cost of college; health care costs; insurance premiums; home purchases? How about the soaring cost of steel? And tenant improvement construction. Do you remember when we used to build out law offices for $45/square foot? Now we’re north of $65. As for the Fed’s “market basket”, we’re curious what kind of wine they’re drinking and the restaurants they choose. So many of San Francisco’s restaurants haven’t survived, and others have chosen to close during lunch. Lunch for two, downtown San Francisco for $100; how about a $30 corkage fee? Sounds like inflation is “under control”, Mr. Greenspan.

GDP, CPI, OIL, IOU. Steady, Steady, O-!@#$%!!!

So what, if our economy isn’t growing fast enough? And if we blow $250+ billion in the next couple of years in Iraq and wage war there (and elsewhere?) for four more years, so? Tag-team $500 billion Fed AND $500 billion trade deficits, so? If people are saving at the lowest rates since the Depression, so? How about the almighty U.S. Dollar, losing 25% of its value in the last two years? $50+/barrel oil (gas lines should re-appear at ~$75-$80/barrel, the inflation-adjusted rate comparable to that 1970’s memory). This is one tenuous, unstable national economy—and most agree that we’re harder hit in the San Francisco Bay Area region than elsewhere.

The economy is brutally injured, compelling the Fed to keep interest rates down. Heaven forbid those mortgage payments jump a couple of points. Which of you will be able to afford it? NOBODY around San Francisco takes out 30-year fix rates anymore. Housing is just too expensive, so buyers leverage to the hilt to get into home ownership. Mortgages are doled out with 5 to 7-year fixed rate loans, which then go to “market”; or interest-only loans. Median pricing for a Bay Area home is ~$550,000; closer to $700,000 in San Francisco proper. If interest rates pop two points on all those interest-only loans, Bay Area homeowners would face ~$800/month increases. Will that increase be measured as part of the CPI? Doubt it.

Jobs, the Unemployed & the Underemployed

Mr. Bush is the first president since Herbert Hoover to complete a term in office with fewer jobs than when he started. On his way out of office (or not), the trend toward a “jobless recovery” has continued. Other than the blips in new jobs reported in March and April of this year, subsequent months have produced far less than the 250,000/month necessary to jump start the sagging economy; September reported growth of only 96,000 jobs. After-the-fact revisions have been negative. According to the Bureau of Labor Statistics (BLS -, to be counted as “unemployed”, a person must have actively sought a job within the last four weeks and have been completely out of work. If you want a full-time job, but have found only part-time work—and haven’t had the time, ability or opportunity to seek a full-time job, you are NOT counted as “unemployed”. The current national unemployment rate is “only” 5.4%.

On the other hand, “underemployed” are those described in a category of “marginally attached” workers—unable to seek work (think of unemployed parents who cannot afford child care, so they must stay at home to oversee their children); and all part-time workers. The current estimated national underemployment rate is a ghastly 9.5%.

57% who lost full-time jobs in 2001-2003 and found full-time work again are earning less, according to the U.S. Bureau of Labor Statistics. Within that body of 57%, 1/3 said they are earning at least 20% less than before being layed off. Twenty percent of those who lost their jobs are still unemployed and an additional 15% are no longer in the labor force (they hadn’t looked for work during the four weeks prior to the Bureau’s survey).

On a more local note, according to a Silicon Valley Manufacturing Group/Wells Fargo study, job growth in the Valley won’t even catch up to year 2000 levels until at least 2010.


Forrester Research estimated that 3.4 million U.S. jobs will be outsourced by 2015. Such an outflow would likely cause a reduction in nationwide demand of 600 million square feet of commercial space. Of course this estimate does not take into account the prospect for “insourcing”, or new job creation. But then, the U.S. Bureau of Labor Statistics doesn’t spell out how many of the “new jobs” are heading for Starbucks, Walmart or Mickey D’s. One fundamental change is certain: The Internet has empowered EVERYONE to become more resourceful and gain access to bright, well-educated people around the planet. Competition will never be the same. Once upon a time you wouldn’t have dreamed of giving your credit card number to “someone” on the Web; today, thousands of companies are entrusting their networks, clients, livelihoods and futures to companies abroad. Thousands of GOOD ideas from the dot-com era will, once again, win financing and —this time—hire grey hairs to build and run successful enterprises. B2B exchanges will add efficiencies to our commodity markets as we strive to compete against internationals.

Consumer Spending. Gassing the Economy

It’s no wonder that the economy has been sputtering. Consumer spending accounts for 2/3 of all economic activity. Q3’s spending decline was the biggest dip since 9/01. After mortgages, health care, child care, insurance and taxes, how much do we have left to spend? As we pay more at the pump, consider that with rising costs per barrel, billions of dollars of consumer spending vaporize. How about another [cheap] interest-only loan? Some used to count on producing our way out of tough economic times—which seems counter to the currently-posed “jobless recovery”, since it’s tough to be productive when you don’t have a job, or one that counts for much. The current emphasis appears to be on spending our way out of this economic difficulty. So, please, do your part and enjoy a vacation or two or three.

Tenants: Get it Straight

Mihalovich Partners represents tenants, only. Our core business is driven toward educating and objectively and aggressively representing TENANTS, only. If you are looking for biased market information serving the LANDLORD community, please see one of Cushman & Wakefield; CAC Group; Colliers; or CB Richard Ellis—whom collectively represent over 38% of the 18 million square feet of space currently on the market. Those four firms have pledged their allegiance to over 200 local landlords. Here’s a direct quote from one of their market research reports: “…the good news is that rental rates are falling at a much slower pace than in the recent past.” This could only be “good news” for their landlord-clients!

Strange as it may seem, bearing in mind their conflicts of interest, we compete with them every day for YOUR business—for the opportunity to represent you, the tenant, in leasing negotiations. C&W, CAC, Colliers and CB control more space than the largest landlords in San Francisco. Mihalovich Partners’ business and approach is diametrically opposed to that of brokers who represent landlords. Are you, the tenant, looking for advice and counsel? You can count on straight talk from us. Advice for tenants, pure and simple. Serving the tenant community in San Francisco for 22 years.

San Francisco Market Overview

Landlords Banking on “The Turn”

The third quarter showed marked improvement for the landlord community, namely HUGE net absorption of space throughout the San Francisco Bay Area. [“Net absorption”, the net change in occupied space over a given period of time; includes direct and sublease space.] As you can see from our figures, below, a whopping 2.7 million square feet was absorbed during Q3 (850,000 square feet in San Francisco). Direct absorption of space (landlord, vs. sublease space) was the best it’s been in ten quarters. Absorption of sublease space continued to post positive territory for the fifth straight quarter. This level of net absorption should be front page news, but we suppose it rather pales in comparison to [the Presidential election] reporting record sales prices for highrises and the level of sales activity driving our local landlords to switch out of The City rather than stay and fight. We must note: The giddy effect of all reported absorption was offset by a total of only 349 deals completed in Q3, fewer than in any of the past ten quarters.

Instead of seeing dancing on the street, the sanguine landlord still views current rent and vacancy rates with disdain. We are, after all, at rental levels cheaper than ever in the past 22 years (when we started serving the tenant community in lease negotiations). Adjusting for inflation, rental rates are hovering at levels not seen since the 1960s. In spite of impressive demand [while noting that record-low interest and rental rates should be good for something!], a monumental 54 million square feet remain available and on the market in the Bay Area. Landlords will be reeling from this pain for a number of years to come. Tenants’ choices are plentiful in every market, in every class of space:

How Many Blocks of Space are Available for YOU?

San Francisco County San Mateo County Santa Clara County East Bay Counties
5,000-9,999 sq.ft. 340 130 200 272
10,000-19,999 263 107 161 163
20,000-29,999 78 39 53 58
30,000-39,999 39 16 28 28
40,000-49,999 14 11 31 14
50,000-59,999 9 6 17 2

You can request a free space survey, containing all direct and sublease space meeting your specific requirements. We can also provide building photographs, floor plans, leasing histories and more. You’ll receive your survey within one business day. To discuss your space needs in person, call 415-434-2820 or email

Vacancy Rates

San Francisco remains under pressure from 18 million square feet of space on the market. The vacancy rate was 15.7% at the end of Q3, down from 16.6% in Q2. Bay Area-wide, vacancies declined 5%, an impressive move for a single quarter—not unlike the bustle of the dot-com days. As noted above in our Editorial piece, we are bearish on the economy, and therefore find it problematic to forecast “the turn around” much of the landlord community has anticipated.

Asking Rental Rates

With the sole exception of direct (landlord space) in San Francisco, asking rental rates for direct and sublease space declined in EVERY Bay Area market. Again, absorption of space has been impressive, but the sheer numbers of space alternatives continue to drive landlords to compete more aggressively. Direct asking rental rates in the City finished the quarter at $23.43 per square foot per year, fully serviced (up from $23.08 in Q2); sublease rates at $16.83 (down 1% from Q2).

Sublease Space Drives Harder Bargains

As we’ve reported previously, there remains heavy action (and positive absorption) in the sublease market, where struggling sublessors offer space at an average of $6.60/sf/yr less than direct (landlord) rates for the same space (the spread has grown by $0.60/sf/yr since Q2).

City Deals in Excess of 50,000 square feet

  • Sedgwick, Detert, Moran & Arnold. One Market Plaza.

BP, Shorenstein, Lucas. Marking San Francisco Down

Boston Properties, one of the nation’s largest REITs and certainly one of San Francisco’s largest and most popular landlords, reported to shareholders that occupancy rates would decline in Q3, pointing in particular to its vacancy at Embarcadero Center. As leases roll over, BP management explained, rents will fall. Eight percent of their office portfolio will turn over in 2005, the bulk being in San Francisco and Boston. Top brass expects 15% to 20% rolldown in rates during the next 18 months. Go figure. With Embarcadero asking rents north of $39, it’s no wonder they expect a downturn.

Shorenstein is marketing a large block of space for availability 11/06. An interesting tactic, bearing in mind the fact that space, on average, sits vacant for 16 months before it leases to someone new. Equally telling in this overwrought marketplace: Shorenstein, a City-reared, local landlord linchpin, has sold 4 million square feet of its inventory of buildings in San Francisco—including the Bank of America World Headquarters Building, 555 California.

Lucasfilm is rumored to be dumping two, not just one, of their new Presidio buildings.

Take Me Straight to the Numbers: Rental Rates. Supply/Demand.

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.

Who Has the Most Space in San Francisco? Surprise…

When we approach a prospective new tenant client, we tell them that we NEVER represent landlords, always avoiding this conflict of interest. So, which of our competitors—leasing firms—do the most landlord representation, and who controls the most space in San Francisco? And, most importantly, why would you feel comfortable having them represent YOU?

Below we’ve surveyed the entire 103 million square foot inventory of San Francisco, and illustrated the companies with the most control of space on the market, the Top 25. You know from our other stats that 18 million square feet is now on the market in San Francisco. The top 4 companies, all office leasing brokerage firms, control over 38% of the City’s vacancy! These brokerage firms are beholden to more than 200 local landlords. Since their allegiance is committed to so many landlords, how can they possibly represent YOUR interests—the tenant’s interests—objectively and aggressively? The top 4 companies on the list control more of the City’s vacancy than Boston Properties (Embarcadero Center, #5); Equity Office Properties (#6), the country’s largest REIT; Hines (#7); and more than Shorenstein (#12). Surprised, are you not?

% Market Share Square Feet # of Landlords/ Buildings

% refers to the percentage of vacant space under exclusive listing by each company. The accompanying figure is the actual square footage available for lease. We have also noted the number of landlords/buildings represented by each entity.

* denotes listing brokers. All other companies listed are landlordselopers.

1 *Cushman & Wakefield of California 13.70% 2,553,144 61
2 *The CAC Group 10.90% 2,033,489 40
3 *CB Richard Ellis 6.50% 1,212,665 40
4 *Colliers International 6.40% 1,184,646 82
5 Boston Properties 5.30% 985,617 6
6 Equity Office 5.10% 955,905 12
7 Hines 4.00% 747,885 11
8 *Cornish & Carey Commercial - ONCOR International 3.90% 721,358 7
9 *Grubb & Ellis 3.60% 667,529 59
10 *Jones Lang LaSalle Americas, Inc. 3.10% 570,314 6
11 Divco West/RREEF 3.00% 559,000 1
12 Shorenstein Realty Services, LLC 3.00% 548,789 5
13 *BT Commercial Real Estate - NAI 2.70% 501,826 32
14 *HC&M Commercial Properties, Inc. 2.10% 396,352 27
15 *Starboard TCN Worldwide Real Estate 2.00% 372,051 98
16 *TRI Commercial 1.70% 320,244 44
17 *GVA Whitney Cressman 1.60% 288,093 43
18 The Gap, Inc. 1.50% 283,000 1
19 *Newmark 1.30% 240,313 8
20 Shorenstein Company, LLC 1.30% 234,754 5
21 *The Staubach Company 1.00% 194,221 6
22 *Arroyo & Coates 0.80% 147,851 21
23 *Ritchie Commercial 0.70% 133,540 42
24 The Presidio Trust 0.70% 128,251 40
25 *McCarthy Cook & Co. 0.60% 118,777 6
All Others 13.30% 2,473,677  
Total:   18,573,291  

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