Market Insight Editorial & Advice to Tenants: 2Q2006

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

If you’re a commercial tenant in the San Francisco area, you’ve come to the right place, The Space Place . If you are a first-timer at our site, know that we are totally and unequivocally committed to serving and representing the tenant community—and that my Editorials are not only meant to be instructive; they are a written record of our market analyses and recommendations; and, from my perspective, an easy way for you to differentiate the quality of our thinking and strategy with those of our competitors.

We begin, as usual, with a broad-brush about the larger economy and fundamental issues which continue to concern us and dampen our enthusiasm. We prefer that you take pen in hand as you read this. Write to us.

Landlords All-Bull. Is Your Broker?

The landlord and landlord-brokerage community do a great job lobbying for higher rates and tighter terms for tenants, don’t they? As they should. But should you chase that bus, or will there be another one coming in just a few minutes? Will you EVER hear from the landlord community (Equity Office Properties; Boston Properties; Hines; Tishman Speyer; Shorenstein, etc.) or landlord-brokers (The CAC Group; CB Richard Ellis; Cushman & Wakefield; Colliers; Cornish & Carey; Grubb & Ellis; BT Commercial, etc.) that rental rates are heading down?! Tenants should come to expect this marvel of unanimity from the landlords’ side! You should no sooner expect Wall Street firms to begin advising investors to short the stock market! Why, then, Tenants—why would you ever hire a landlord-broker to represent your interests in a renewal or relocation negotiation?! There’s too much at stake…and it’s in your best interest to align yourselves with a broker beholden to you—NEVER beholden to landlords. During the past several months, we’ve been writing about our concerns over the economy…fundamental concerns over these issues. Shouldn’t you be in tune with these issues as you anticipate concessions in your lease negotiations? After all, the office space market is a “market” comprised of willing buyers and willing sellers. How you “trade” the market is our expertise, 24 years representing tenants…and weighing these issues all the time:

  • The financial impact on the economy of the War on Terror (now $10 billion/month, plus untold losses). The Gov doesn’t float bonds for us to vote on to appropriate $500 BILLION for the WOT; they just keep selling Treasuries to produce funding for the War. Is this inflationary? You bet. Will we see a continuing weakness in the economy as interest rates climb and consumer confidence wanes? You bet.
  • Foreclosures are starting to soar. Up 160% in California vs. last year. Nevada up 225%. Florida up 62%.
  • Soaring oil prices. Oil north of $60/barrel is inflationary, alarming and necessary. New discoveries of oil will not temper our obscene consumption levels. Get used to it, or worse. But the heat is on the consumer—a negative on the economy and likely to be an irreversible trend.
  • War in the Middle East, coupled with Iran’s burgeoning nuclear program. How can this be friendly to our economy?…unless we ignore it. The American consumer has short-term memory, only. So noted. Charge away.
  • American savings rate - less than zero. Americans are more leveraged than at any time in history. A downturn in the economy could produce significant trauma.
  • P/E Ratios “mountainously beyond normal”, according to “Irrational Exuberance” author and Yale professor Robert Shiller.
  • Gold, a “security” when times are tough, is trading at a 26-year high.
  • The Federal Deficit. Bush projected $423 billion for 2006, up $100 billion over FY 2005…NOT including additional funding requests for the War on Terror.
  • The Trade Deficit (expected to be ~$900 billion in 2006.)
  • Soaring health-care-coverage costs. 40 million Americans carry no insurance.

“Stop-Shopping”: Landlord & Tenant Keep Their Word

We’re told by many landlords in the community that we are the rare exception using a “stop-shopping” clause in our Letter of Intent negotiations. This is surprising and disappointing since such a clause accomplishes several important fetes. Knowing that our readership, here, is significant—especially from our friendly competitors in the brokerage community—we offer this business advice freely:

  • A stop-shopping clause appears in the LOI to make it clear that both parties—Tenant and Landlord—are “done” with respect to any further negotiation of major points. If you had a heavy point to make, you’d better have done it in the LOI. After the LOI is fully executed, everything contained in it is “golden” and NOT subject to change in the course of lease documentation—that phase of formality when the LOI points and other legal issues are spelled out. The major business points, though, are “done”. No more shopping.
  • A stop-shopping clause wakes up the crowd on both sides of the negotiating table. Since the tenant, our client, expects the landlord to refrain from ANY negotiating with other parties for the space while the lease documentation is in progress, signing one’s name to such an agreement must be taken seriously. It is a clear sign to a landlord that there is no hidden agenda; and vice versa. In a moving market—up or down—it gives comfort to both parties that they can focus purely on completing the lease and getting through a closing without being distracted by the whims of other bidders…or the temptation of an owner to take a potentially “better” deal.
  • The flip-side of this issue is to ask yourself (if you are the tenant): “Why will this landlord—with whom I am about to enter into a long-term business relationship— be UNWILLING to commit to a stop-shopping clause?” “Will I be left at the alter?” “What commitment to the transaction is the landlord really making?”
  • Letters of intent are rarely, if ever binding. Keep that in mind. But LOIs do not have to be—and should NOT be meaningless points to be re-traded again and again. A skillful broker representing you will make sure that ALL of the beefiest business points are negotiated into the LOI. Why bother with such an intense effort and negotiation if either party is not committed to those points moving forward.

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; The CAC Group; Colliers; CB Richard Ellis; Grubb & Ellis; or Cornish & Carey—whom collectively represent over 53% of the 12.5 million square feet of space currently on the market. Those six firms have pledged their allegiance to over 275 local landlords.

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, CB, G&E and C&C control more space than any landlord 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 24 years.

Dan Mihalovich (
Principal of Mihalovich Partners and Founder of The Space Place®

San Francisco Market Overview

Office Market Pricing Out Demand: Tenants Pull Back

If you believe in free-market economics, as we do, we study not only the fundamentals of our local “bubble” in the San Francisco Bay Area, but also those of the national and global economy—trying at all times to extrapolate potential effects on our local businesses. This quarter we’ve noted a significant reaction from the tenant community to the recent surge in asking rental rates…perhaps also a reaction to macroeconomic trends, which appear weaker for a wide variety of reasons discussed below. Net absorption of space in San Francisco plummeted in Q2, to just over 80,000 square feet. We’re back to negative absorption in San Mateo County (-680,000 square feet) and the East Bay Counties (-6,000 square feet). There’s no question that tenants are voting with their feet—with their tails in between. In spite of sliding demand, landlords continued to try to push rates even higher. Does this make sense to you? Citywide average asking rental rates popped up to just north of $28/square foot per year for all classes of space. Class A building owners in the Central Business District (CBD) have pushed averages to mid-$30s or higher…but can the average Class A tenant afford to pay such rates, especially when coupled with significantly higher construction costs to fit out new space? We think not.

Free markets WORK (markets constantly adjust, up or down, to supply/demand factors) and this market is no different. Yes, there will always be a crop of tenants whose allegiance to San Francisco is completely inelastic—those who will never move, no matter what; and those who’ll pay any price. But history in the City has shown that it’s not that group dictating the pace of leasing in the City, nor compelling developers to build new buildings at outrageous expense. The market is driven by small to mid-size tenants who remain keenly sensitive and reactive to clamp-downs on profitability. Non-profit organizations, most of whom find little empathy from the landlord community, have suffered dearly trying to negotiate for space during the past year.

Why are tenants still signing deals well into the $30s, $40s, $50s or more? How did they make it work paying $80 to $100 per square foot during the Dot-Com? Well, many of those businesses aren’t around any longer. And some who are locking in rates today will have a difficult time in the future, too—yet they have leases expiring and feel compelled—potentially compelled by commissioned brokers—to “take advantage while you still have choices…and before the market climbs higher!” Who will drive the rates higher? Will you? Don’t you have alternatives and shouldn’t we be assisting you to identify and quantify those cost-savings?

Vacancy Rates: Are Your Options Fading?

Landlords, their listing brokers and developers dance to the tune of lower vacancy rates, so tenants should watch carefully to detect how and to what extent your field of options declines. In the City, Q2 vacancy rates decreased by 4%. But which size blocks of space are getting leased? Discussing vacancy and absorption rates can be confusing to some. What language makes sense to tenants? Tenants ask, “Tell me about my specific options. How many choices do I have?” Are your options fading, as a result of recent leasing activity? Review the chart, below, and let’s discuss:

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.

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

Take Me Straight to the Numbers: San Francisco Bay Area 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 12.5 million square feet is now on the market in San Francisco. Four of the top 5 companies, all office leasing brokerage firms, control over 53% of the City’s vacancy! These brokerage firms are beholden to more than 275 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 brokerage firms on the list control more of the City’s vacancy than Tishman Speyer (#6); Boston Properties (#7); Equity Office Properties, the country’s largest REIT (#9); and Hines (#11). 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 *The CAC Group 14.9% 2,110,720 46
2 *Cushman & Wakefield of California 11.2% 1,591,957 50
3 Shorenstein Company, LLC 8.7% 1,232,952 13
4 *Colliers International 8.1% 1,143,340 84
5 *CB Richard Ellis 6.6% 931,260 24
6 Tishman Speyer 4.4% 631,789 2
7 Boston Properties, Inc. 4.3% 606,003 4
8 *Grubb & Ellis 3.9% 548,427 59
9 Equity Office Management, LLC 3.1% 442,760 10
10 Cornish & Carey Commercial - ONCOR 2.8% 404,427 13
11 Hines 2.5% 360,379 8
12 *Jones Lang LaSalle Americas, Inc. 2.1% 304,140 9
13 *Starboard TCN Worldwide Real Estate 2.0% 288,436 99
14 *Studley 1.6% 233,645
15 Letterman Digital Arts, Ltd 1.4% 204,702
16 *Ritchie Commercial 1.2% 166,069 47
17 Bently Holdings California, LP 1.1% 155,742
18 *GVA Whitney Cressman 1.0% 145,825 27
19 The Presidio trust 1.0% 141,710
20 *TRI Commercial / CORFAC International 1.0% 136,527 35
21 Charles Dunn Company, Inc. 1.0% 135,215 18
22 Pacific Eagle Holdings Corporation 0.9% 122,512
23 Strom & Associates 0.8% 116,898
24 CRESA Partners 0.8% 107,029
25 Blatteis Realty Co. Inc. 0.7% 98,313 70
  All Others 13.0% 1,840,968
  Total   14,201,745  

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