Market Insight Editorial & Advice to Tenants: 4Q2006

UPDATE: MARCH, 2007. GOOD NEWS FOR TENANTS!

Tenants: Here’s some “GOOD NEWS” for you. Landlords should take notice that it’s not all one-way! Year to date net absorption of space in San Francisco is NEGATIVE:

  • San Francisco County: Negative-growth 120,000 square feet

Please stay tuned for our Q1 2007 News & Editorial for further information.

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.

Thanks To Our Clients! Announcements

We are pleased to have represented a spectacular group of clients, recently, in several renewal and relocation negotiations. With great thanks, we announce:

California Academy of Sciences California Academy of Sciences
Lease Extension, 875 Howard Street (CAS returns to Golden Gate Park in 2008!)
The Bar Association of San Francisco The Bar Association of San Francisco
Relocation to The Old Fed, 301 Battery Street
DPR Construction, Inc. DPR Construction, Inc.
Renewal at 1050 Sansome Street
Go Fish Go Fish
Relocation to 706 Mission Street
Latterell Venture Partners Latterell Venture Partners
Relocation to One Embarcadero Center
Rouda, Feder, Tietjen & Zanobini Rouda, Feder, Tietjen & Zanobini
Renewal at 44 Montgomery Street
Egoscue Egoscue
Relocation to 625 Market Street
Mission Bell Manufacturing Mission Bell Manufacturing"
New San Francisco Office at 475 Sansome Street

American Comparative Advantage: Consumer Spending & Debt

We’ve written on numerous occasions about the tenuous state of our economy, hinged 2/3 on consumer spending. But one has to admit that consumers have done a hell of a job of it lately, albeit at the cost of hawking one’s grandchildren. Last quarter we hosted a spectacular article about consumer debt, “Requiem for a Housing Bubble”. We hope that you read it. This was quite an intro to the Bush Administration’s announcement of the proposed federal budget, starting October 1, 2007…a $3 Trillion Fed Budget. The Pentagon, by the way, will get an 11% raise to $481 billion…plus another $235 billion in WOT (War On Terror) costs for the next 18 months. Sorry, Medicaid, a $12 billion haircut.

Incredibly, the Administration has figured out a way to “spin” the national debt realities with deficit-double-talk. According to the Washington Times, “while the Bush Administration has been taking victory laps as the unified budget deficit declined from $413 billion in 2004 to $318 billion in 2005 and $248 billion in 2006, the annual increase in the national debt barely changed. The national debt soared by $595 billion in 2004, $551 billion in 2005 and $546 billion in 2006. To put a fine point on the matter, the national debt has increased from $5.728 trillion on Jan. 20, 2001, to $8.713 trillion last week. When fiscal 2007 ends on Sept. 30, the national debt will exceed $9 trillion, according to the administration’s forecast.” Can we break the back of the American consumer? We’re giving it a good go. Be prepared for the fallout.

Got Savings? How About Zero.

We’ve touched on this theme before. The U.S. savings rate is now below ZERO. How has the economy “grown”? CREDIT. U.S. credit is growing about four times faster than GDP growth…NOT a good sign for our economy. According to investor/fund manager, Marc Farber, “asset inflation, which replaced consumer price inflation starting in 1980, led the American public to believe that rising asset prices—first equities and, since 2000, home prices, would be permanent features of the economic environment. Therefore, U.S. households began to save less and less and to rely increasingly on rising asset prices to take care of their future retirement needs.” Bridgewater Associates, which manages over $150 BILLION for its clients, reported that “if U.S. households ever returned to just a normal savings rate, U.S. GDP would collapse by about 7%!” Farber concluded, “Now why would the U.S. savings rate ever move back up? Once the housing inflation comes to an end, and households can no longer refinance their homes at lower interest rates, consumer confidence will tumble and lead to a rising savings rate, and along with it, to a recession.”

Trade Deficit: Crushing New Record

Now for the trade deficit, up 6.5% over last year…to a record $764 BILLION…large enough that experts suggest that exports would have to grow by more than 50% faster than imports for the trade gap to remain at the 2006 level. The rising cost of oil imports didn’t help…up 24% over 2005. Other huge factors? The loss of market share for our automakers.

Consumers Choke: Spot Me $300 Billion?

Stephen Church, founder and 20-year investment advisor at Piscataqua Research, Inc., opined that about $300 BILLION of consumer spending has recently disappeared in the U.S., as that roughly estimates the drop in mortgage equity withdrawals lately. He argues that the U.S. economy cannot possibly absorb such a dramatic decline in spending, suggesting that the slowdown SHOULD lead to a recession, but that “the Federal Reserve is determined to prevent one”. “The latest economic statistics show that consumers depended on new debt for 90% of their cash flow during 2006”…consumer debt levels are simply too high. “Our preferred liquidity measure”, he stated, “includes all checkable deposits included in M1. This measure has declined to under 20 days of funds in December, 2006. At the start of the last recession, we had nearly one week more of funds at about 26 days”.

Go Get Lucky: $400 Billion Fed Contract Giveaway

GSA, the federal government’s management agency, is doing their part to process fraudulent spending and incompetence amongst federal contractors. There’s only one problem: They’re short of people to process the cases. What did they do? They hired another contractor to handle the case work. Federal contracts, which cost the government $207 billion in 2000, now run about $400 billion! According to the New York Times, the richest target for federal contracts is from the Department of Homeland Security, whose website posting, “Open for Business”, highlights hundreds of opportunities…from $500,000-$1,000,000 for “working with selected cities to develop and exercise their catastrophic plans” to $20-$50,000,000 to “conduct studies and analyses, systems engineering, or provide laboratory services to various organizations to support the DHS mission.” This is great work, if you can get it!

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 45% of the 12.5 million square feet of space currently on the market. Those six firms have pledged their allegiance to over 270 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 nearly 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 (dan@TheSpacePlace.net)
Principal of Mihalovich Partners and Founder of The Space Place®

San Francisco Market Overview

Tenant Occupancy Costs In San Francisco Soar 65%

San Francisco wrapped up 2006 on a “positive” beat—“positive”, that is, if you’re a LANDLORD and not a TENANT. As you read from our competitors’ market reports that the office markets “improved”, ask yourself, “improved for WHOM?” and begin to question, “Should that firm represent me?!” . Mihalovich Partners represents tenants, only. This report is geared for YOU, tenants, and we provide some sage advice, here, for those of you facing lease expirations during 2007-2009. The market has turned UGLY and you’ll need help to see your way through this marketplace. The viability of your business is at stake.

On market conditions: Net absorption of space in the City in Q4 was just over 1 million square feet, more than the first three quarters of the year combined. Asking rental rates, of course, followed suit…up 17% for direct space! The tenor was similar in San Mateo and Santa Clara Counties, with positive absorption of 390,000 and 950,000 square feet respectively, although asking rental rates were up only 2% in each county. The LOSER in the Bay Area—and an indication that NOT ALL MARKETS are rosy around here—was the East Bay, where Alameda and Contra Costa Counties experienced NEGATIVE ABSORPTION (NEGATIVE GROWTH) of nearly NEGATIVE 1.1 MILLION square feet for Q4 and NEGATIVE 1.6 MILLION square feet for the year. Are you beginning, finally, to wonder if the markets are working? Tenants in the East Bay are pushing back…and the market is dumping more space faster than it is leasing it.

Meanwhile, back in San Francisco, as we described in our last report, total occupancy costs have been soaring out of control—considering rent increases, increased costs of construction and reduced tenant improvement allowances:

“If your competitors signed their office leases in 2005 at $25 per square foot (representing 8% of their gross revenues) and you are compelled to sign in ’06 or ’07 at $35/sf (representing 11.2% of your gross revenue), you’ll have paid a forty percent premium for space vs. your competitors. It is really an understatement to say that rental rates have increased during the past 12-18 months. In fact, this local inflationary factor may bury some of your competitors. Inflation (which we’ve written about many times) eats into our 70%-consumer-driven economy. We fight harder to stand still, or we lose ground. In the example above, the party signing in ’06/’07 has far more to lose when one considers the raging inflation in building materials costs. Tenant buildout costs, which we focus on below, have soared’and landlords, in this tightening marketplace, have done little to absorb the change. TI allowances may have paid for nearly all of the tenant’s buildout in 2005. For the tenant signing in ’06/’07, perhaps 50% of the cost will be borne by the tenant. Let’s not forget that interest rates are substantially higher these days, too, so financing one’s TIs will be all the uglier.

“Pity the tenant who has to come out of pocket ~$35/sf to pay for the balance of TIs not covered by the landlord’s allowance. Amortizing the expense over a 7-year lease, for example, will add another ~$6.25/sf/year to effective rent. Now your $35/sf lease really costs you $41.25/sf/yr (13.2% of your gross revenues)’vs. the $25 deal your competitors did in 2005. All in costs for the ’06/’07 tenant vs. the ’05 tenant? A sixty-five percent increase. Now that’s inflation.”

Landlords/Sublessors Who Must Compete For Your Business

Tenants: Here’s part of the chain of events leading to SOARING occupancy costs. We can help you, as your representative, to create strategies to deal with these market factors…and create a leasing transaction which accommodates your needs:

  • Construction costs and, therefore, replacement costs for new highrises, have soared (as we’ve previously reported in our Q3 2006 report). Landlords building new buildings will need ~mid-$60s rent to justify their costs.

  • As replacement costs have soared, investors trying to buy existing buildings have “chased” up prices to historic highs, under the assumption that buying buildings at a discount to replacement cost is a “good deal”. These investors, betting on the come that (a) new buildings are actually necessary and justifiable, economically; and (b) that tenants will pay whatever rent is asked of them—no matter what—are holding out for rental rates to justify their new purchases. Make sense to you? These investors are your CURRENT landlords…such as Hines; RREEF; EOP/Blackstone/Morgan Stanley; Beacon; TMG; Lincoln; etc.

  • Other than those developers who have already entitled their developments to produce more residential units (which are expected to sell for $1,000/square foot), anyone who is able to renovate and/or create additional office space is likely planning to do so now…just as in the hay days of the Dot Com. After all, so it’s said, the market is more “stable” now than during the Dot Com; growth in the tenant base is widespread; rents are only going up; interest rates remain historically cheap—so let’s build on!

  • In response to growing demand…and on the hope and prayer that tenants will continue to soak up space no matter what the rates…we now have 1.2 million square feet of office space under construction in San Francisco’s CBD, including 555,000 square feet at Tishman Speyer’s 555 Mission Street—none of which is pre-leased. But is this too much, too soon? Are current and prospective new landlords squeezing too tight? At some point, of course, the market will “work” and tenants will push away from the negotiating table. How much of the increase in rental rates is driven by tenant demand…and how much is driven by the force of too much investor/fund-money chasing too few buildings for sale? As we’ve written here before, we believe that the vast majority of businesses CANNOT AFFORD current and projected market rates for space in the City.

  • “New” space will compete with major blocks of space (multiple full floors) vacated or about to be vacated in many Class A buildings throughout the City. See our analysis of Contiguous Blocks of Space to note that in Q2 of 2001, Bay Area Counties had a supply of 42 million square feet available for lease on the market. Today the Bay Area markets have 44 million square feet on the market. Tenants in San Francisco have a LARGER number of parcels to choose from in today’s market than in Q2 of 2001—the period just before our markets crashed. If you’re a landlord (or a landlord broker from The CAC Group, Cushman & Wakefield, CB Richard Ellis, Grubb & Ellis, Cornish & Carey, Colliers, BT, etc.), you’ll be competing to “sell” tenants on your space. OUR job is to put a collection of these landlords’ feet to the fire, to see which will offer you the best set of economics, terms and options to accommodate your needs. Check out these major availabilities, noting that not all are Central Business District, yet a City business could consider ALL of these locations:

    • 1 Front. 130,000 sf
    • 100 First. 150,000 sf
    • 123 Mission. 85,000 sf
    • 135 Main. 120,000 sf
    • 150 Spear. 60,000 sf
    • 160 Spear, 100,000 sf
    • 303 Second. 120,000 sf
    • 333 Bush. 150,000 sf
    • 345 California. 150,000 sf
    • 350 Rhode Island. 105,000 sf
    • 425 Market. 155,000 sf, 3/08
    • 45 Fremont. 170,000 sf, 8/08
    • 500 Terry Francois. 280,000 sf, 1/08.
    • 555 California. 140,000 sf
    • 560 Mission. 93,000 sf
    • 575 Market. 200,000 sf
    • 686 Folsom. 360,000 sf, late/08
    • 71 Stevenson. 150,000 sf, 8/07
    • 75 Hawthorne. 72,000 sf
    • 505 Howard. 195,000 sf
    • 875 Howard. 170,000 sf
    • Four Embarcadero Center, 140,000 sf
    • One California, 140,000 sf, if/when Marsh vacates late/08
    • One Letterman. 180,000 sf
    • Two Embarcadero Center. 125,000 sf
    • 370 Third. 390,000 sf, 1/08

  • In addition to the vacant, scheduled-to-become-vacant and “new” space coming from newly constructed buildings, an additional mounting supply of space lies in-progress in various stages of entitlements and approvals. Other office projects which were previously approved, zoned for office and ready to launch—which ultimately went residential instead—are purportedly back on the office track, with the recovery of the office market…such as Beacon Capital’s 27-story 535 Mission building and the proposed conversion of 250 Brannan. With 30,000 residential units under construction in San Francisco and a softening residential market, why build more condos?

    Beacon is also planning to add floors to the old Bethlehem Steel Building at 100 California…266,000 square feet. RREEF is planning to do the same at their newly acquired China Basin Landing, with the addition of 183,000 square feet to the Berry Street building. Tishman Speyer is planning another 600,000+ square feet at 222 Second Street—billed as a green project to grease its way through the Planning Department.

    Who will fill these buildings at $50s to $70s rental rates? Will YOU?

Small Businesses (The Majority Of Demand) Speak

To the delight of the landlord community, the vast majority of tenants leasing space in the San Francisco Bay Area are “small businesses”. “Small”, in San Francisco, ranges to around 7,000 square feet—a size which many an owner finds easy enough to manipulate in a variety of ways. Large blocks of contiguous space, which sat idly by after the Dot Bomb, were divided into much smaller parcels by then-desperate owners to seek income from the most active tenants in the marketplace: “small businesses”. Building owners pre-designed and pre-built “spec suites”—spaces which would literally be ready for occupancy on the day the lease was signed…as an enticement and time-saver for smaller companies, most of whom do not usually plan far enough in advance or simply prefer to avoid the challenges of design and construction. With the convenience, of course, came the premium smaller tenants paid for these spaces. As demand in 2006 surged, so did asking rates for space. The question now, is, are current asking rates justified and should they continue to rise?

In the annual Small Business California survey, SB-Cal approached over 400 companies on a myriad of issues. Approximately 55% of their respondent companies are from the San Francisco Bay Area. When asked about the economy, only 52% rated the economy “good to excellent”. Only 29% rated the business climate “good to excellent”. More specifically, only 14% rated the business climate for small businesses “good to excellent”. Asked to project out a few years, only 30% forecast a “somewhat better or much better” business climate. SB-Cal asked companies if they thought California was headed in the right direction. Only 40% agreed. These are NOT votes of confidence from the small business community. We’ve wondered, lately, whether anyone from the landlord community—especially those building new buildings—has bothered to survey the tenant community to ask questions about the sensitivity to rapidly rising rental rates. Is anyone listening to those who have to write the rent checks?

Tenants: How To Survive The Big Ugly

In many respects, we’ve been here before. Seriously, we’ve been representing tenants in the City for 32 years—all but a few of which have been great years for tenants! The Dot Com period comes to mind, now, but with seasoned experience; better tools and technology; greater flexibility to address HR issues than several years ago. Facing soaring occupancy costs, tenants, what should you do about it?!

  1. Do NOT assume that your next office leasing transaction will be anything like your last negotiation. There may be FAR MORE AT STAKE this time and a great deal more strategy may be required in order that your organization to survive - and hopefully thrive - during your next lease term.
  2. STRATEGY SESSIONS

    As we’ve mentioned in previous educational articles, it normally takes between 12-15 months of planning to either effectively renew one’s lease or execute a relocation to a new site for a tenant of 10-20,000 square feet or so (LONGER for larger tenants). However, under the circumstances, we recommend starting the entire process even earlier—giving yourselves an additional three months, or more, to delve into the really tough issues facing you in your next set of decisions.

    1. Hire your broker [Mihalovich Partners] and assemble your representative management team, first.
    2. We will help you to assemble the rest of a Strategic Team, including an architect/space planner; Team contractor; a furniture consultant; your IT specialist; and any other primary consultants necessary to launch a strategic study about your current and future occupancy needs. EVERYTHING about your office leasing needs should be on the table for discussion, since the magnitude of expenses have risen so dramatically since your last negotiation.
    3. HR will play an ever more critical role on this next lease. Careful examination should be made, not only of current and prospective employee home-locations, but also to perform a study to detect employee sensitivities to relocating…to either “suburban” areas of San Francisco, or to outlying counties…or potentially out of State.
    4. Telecommuting/hoteling/”hot-desking” should be explored. To what extent, if any, could your organization “export” its full-time and/or part-time employees to either work in the field and/or at home. It may become feasible, with rising rental rates, to build out and furnish work spaces in home offices—potentially to even contribute or pay the entire cost of retrofitting an employee’s home to accommodate a work space. Parking and transportation costs should be considered as well as the organization’s carbon “footprint”.
  3. FURNITURE

    Tenants/clients are relieved to know that we’re here to assist you with RENEWAL negotiations…not just to orchestrate the competition for your business amongst several outside building owners. Your current landlord must compete for your business, too. Early on, during these strategy sessions, the conversations may focus on what you know best—the space you currently occupy—with all of its benefits and challenges. BEFORE assuming that the existing space is too small or that it can’t possibly be renovated to accommodate additional growth…let your team explore all the possibilities:

    1. Fact-gathering has to be done very early on. It may turn out that buying ALL NEW furniture and phasing a renovation of your space, while you occupy it, may be a LOT cheaper than relocating. You simply won’t know if you don’t do your homework. New furniture systems may be more efficiently layed out than when you last shopped systems.
    2. Given a choice between new furniture systems and keeping the old, but relocating to an inferior location, your management team and employees may opt to renew and “refresh” the space. You may explore “green” systems, as well as “green” paint and carpet tiles.
    3. Explore the democratic nature (or lack thereof) of your organization. You may decide to demolish some or all of the private offices in favor of creating more efficient space—adding more people without taking more space—opening up the light and views to more employees, too.
    4. The new lease—even a renewal—is a good opportunity to purge old files and examine all storage capacities and efficiencies. Off-site storage should be examined. Can more office space be created within your premises by creating either central files and/or taking storage off-site? Is condensed filing an option, even if it takes adding structural elements to the floor/walls/ceiling, if it saves office-space rent? New furniture systems are more efficient, all-around. They are built to handle “modern” filing; new telecom equipment and power; and can generally be moved within the office with greater ease than the old systems. Remember, we are planning for the future, too. In rising rental rate markets, one should maintain as much flexibility as possible.
  4. OPERATING EXPENSES AND TAX ASSESSMENTS

    Long before your lease is due to expire (as we recommended, above), in your strategic assessment of your current building, your broker [Mihalovich Partners] should review the history of operating expenses and tax pass throughs from the landlord. Each and every building you will consider during the landlord-“contest” for your business will provide us with their operating expenses…past and projected; and we can verify the tax status, the currently assessed value of the property.

    1. With many months still running on your lease, it will be time to close out any “old” issues with the landlord before getting on to the “new”. Have you been overcharged for operating expenses all these years? How do you know? Did you ever exercise your right to audit the landlord’s books? We have a new article for you to read on this topic…but suffice it to say that you need to “square up” with the landlord and collect on any overcharges before entering into renewal discussions.
    2. Under Proposition 13, your landlord’s real estate taxes and, therefore, their billings to you, should not have increased more than 2%/year during the lease. Noting that your building may have recently sold, however, and will be reassessed to current “market” levels, the pass throughs could be HORRENDOUS. Judging from the recent purchases of buildings from EOP by Morgan Stanley, many of those tenants may see $5.00/square foot/year increases in taxes—and for NO incremental “value” to the tenants!
    3. Understanding and quantifying your CURRENT building expenses, and the forecasts, will lay the ground work for your team to assess all of the competing buildings in our comparison matrix. The grass may not be greener, folks, as ugly as it may appear in your current building. Total expenses may be a LOT more expensive—and the ensuing pass throughs—at other buildings. The PROCESS we lead you through will ferret it all out. The operating expenses and tax bills are just a couple of the many line item budget points for us to consider—as we calculate your projected TOTAL OCCUPANCY COSTS.
  5. THE ARCHITECT’S JOB: WHAT ARE YOU AFTER? EFFICIENCY?

    Plan, plan, and plan some more, as we described above. It cannot be overstated at this time and in this economy. There is far too much money at stake. In fact, your business is at stake. The Tenant-Team Architect will assist us in many ways, not the least of which is to interview all key management team personnel to produce a working-document: “The Program”; your space needs, as defined by YOU and told to your skilled architect/space planner. Your current space, if at all a possibility for renewal, should be carefully examined by your architect to explore any and all productive ideas for renovating to create additional efficiencies—all juxtaposed to your Program. Your architect will likely “see” opportunities that the rest of us cannot.

    1. They will also examine the way you do business. How do people and traffic flow in your space? Are the current and projected adjacencies appropriate?
    2. What are you losing, if anything, being on more than one floor?
    3. Could it make sense to departmentalize and locate a “support” or “service” group on a lower floor? In a nearby building? In a suburb? Can your IT people support such a split? Will morale allow it, even if the economics make sense?
    4. What flexibilities are there in your Program? These areas should be well defined, if possible, since many a landlord in this tightening marketplace will be quite rigid about offering expansion or contraction options. How TIGHT can you manage, if you feel compelled during negotiations to gravitate toward LOWER square footage alternative sites? Your architect will need your direction on these fronts, to be prepared to react to highly expensive construction costs/higher rental rates.
    5. Examine after-hours usage. In our experience, the vast majority of building owners do NOT know how to calculate their actual costs for providing after-hours HVAC service, beyond the basics of the cost of union labor to run the system. Power calculations are complicated, but we want to ensure, at a minimum, that you’re only charged at-cost…without markup. So, most often these charges mady by the landloard are arbitrary. Your architect and contractor should explore ways to create more efficient systems within your premises…all to minimize the extraordinary costs of after-hours occupancy. Using just three hours of “extra” air conditioning per day, at, say $150/hour, would cost you over $540,000 during a five-year lease. Can we save some money…and energy?
  6. NEGOTIATE. THEN NEGOTIATE SOME MORE. THEN…WELL, JUST HIRE US.

    If you’re a tenant of size (in San Francisco that generally means greater than 10,000 square feet), you’ll still be respected by most of the landlord community—in spite of rising rates, etc. Most of you, though, do not live in the world of negotiating as we do…and it’s not only OK to entrust us with this fiduciary responsibility on your behalf…you should find great comfort in doing so, knowing that our Principal, Dan Mihalovich, has handled over 200 representation assignments in his 24 years in the San Francisco leasing community. As you’ve read this Editorial, written by Dan, and reviewed his 30+ letters of recommendation, do you get the sense that we’re on to something important—tracking these issues, trying to prepare you for your upcoming project? NEGOTIATING the business terms and lease will be “the meat” of it. We will have you simultaneously pursue AT LEAST three buildings, if not five…including a renewal, if possible and desirable. Do we need all five to meet the best of the best of terms in order for your project to be successful?

    1. Only one alternative, assuming that ALL of your short-listed buildings are serious contenders, needs to be the “perfect fit”. After all, you will sign only one Letter of Intent, not more, in the building where you decide to spend your future.
    2. The most aggressive, straight forward, eager and forthcoming landlord usually rises above the rest fairly early in the process. However, one must keep one’s options open…until YOU are ready to make a commitment. Our letters of intent are usually more thorough than any of our competitors. Why? There are scores of business issues, and the purpose of a Letter of Intent is to flush out and identify ALL of the important business issues…leaving the balance of LEGAL issues to be reviewed during lease documentation. We do NOT “bury” or defer important points to a later date after LOI execution, when much of the leverage is diluted. LEVERAGE is paramount. Repeat. LEVERAGE is paramount.
    3. TIME, the availability of time, is paramount to creating a successful negotiation. DO NOT delay the entire STRATEGY process or subsequent processes because you think your lease expiration date is too far out…It’s NEVER too early to create the strategy we referred to above. USE THE EXTRA TIME to your advantage. We should not be rushed through this process. You’ll have ONE chance to have your transaction put together on time; on budget; and managed by us in the most methodical and productive way for everyone.
    4. ALL options will be considered for renewal and relocation sites, provided that you want to pursue a renewal or relocation within your building. Perhaps the expansion space you desire isn’t currently available through the landlord. OK. But we will pursue ALL options, including those which may become available through other tenants in your building! Your landlord, in this tightening marketplace, may not be an interested party if the best deal is for you to pursue expansion space with another tenant in the building! Be flexible. Be creative. We’ll explore all the options together.
    5. CREATIVE brokerage is paramount. We have dozens of examples to share with you. We’re here to save you lots of time and lots of money…even in the face of a tightening market.
    6. FOCUS from your broker is paramount. Unlike our competitors, we’re focused on a small number of deals each year—and we ALWAYS REPRESENT TENANTS, ONLY.
    7. It’s OK to BE DEMANDING. We’re used to it. We’re up to it and we’re ready to help you.

Most importantly: plan, plan and plan some more.There is far too much money as stake. In face, your business is at stae.

The Sale(s) Of The Century: Goodbye Equity Office

To hear Sam Zell tell it, the deal to sell EOP to Blackstone had “nothing” to say about the public real estate market. No one “should make an assumption that the markets are anywhere in particular on the basis of this transaction. The office markets are very hot and we couldn’t have received such an offer if they weren’t very hot.” But why sell the entire company? Why did Sam Zell do it? One thing we know for certain: CEOs in the REIT community don’t come much more shrewd than Sam Zell; you don’t sell when you’re bullish.

Blackstone, through its acquisition of EOP, acquired and promptly flipped all of its San Francisco properties to Morgan Stanley (other people’s money) for $2.5 BILLION. 10 buildings, including One Market Plaza. Could the alleged valuation of $800/square foot for One Market Plaza be true? There will be hell to pay in real estate taxes, tenants, if so. The 10-building portfolio, according to EOP reports, were 13% vacant, with average rents amongst their tenants of $40.08/square foot/year (fully serviced). Buying buildings at or above replacement cost, Morgan Stanley must be looking ahead at average rates well into the $60s and $70s. Rumor has it that the upper floors of One Market Plaza can be yours for only…$100/sf/year. Pass the kool-aid.

Please call us to discuss this issue. We would prefer that you NOT fall victim to paying these types of rates. By the way, Blackstone flipped another $2.88 billion in 24 buildings in LA and Orange to Maguire Properties.

How about Beacon Capital Partners, who’s owned several San Francisco buildings for just a few years…and is now offing them at a marked profit. Do they, perhaps, sense weakness coming to the market? Why sell, otherwise? Beacon will say goodbye to Citicorp Center; 50 Beale; 100 California; and 120 Montgomery.

Private Equity Buyers: Bid Up And Buy/Then Sell Your Building

Private equity investments in deals in 2006 were at stratospheric levels…at about $146 BILLION, according to Merrill Lynch. Not quite the peak of 2000, when privates raised $182 billion. “Shareholder activists”, they’re now called. You may recall them as “Raiders”. In any event, the promise is to buy up, cut costs, run the investment harder and smarter and ring the cash register. They are not your landlords for long. More than likely, during the course of your ten-year lease, you’ll get to know at least a couple of different owners…so do your best to protect yourselves against tax increases from reassessments! As valuations of buildings start to get too high (if we’re not “there” already), as they did during the Dot Com, watch out below. When EOP, Beacon, Shorenstein and other major players have sold out their positions in San Francisco, who will stand in to buy? Will Boston Properties sell next?

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, Q4 vacancy rates declined from 10.1% to 9.2%…an 8% decline. 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.

Here’s an intriguing statistic for you. BET YOU’LL BE BAFFLED:

In Q2 of 2001, Bay Area Counties had a supply of 42 million square feet available for lease on the market. Today the Bay Area markets have 44 million square feet on the market. Tenants in San Francisco have a LARGER number of parcels to choose from in today’s market than in Q2 of 2001—the period just before our markets crashed. Today, of course, the trend for absorption is “up”…but the stats should give you reason to wonder—what kind of Kool-Aid is the landlord community drinking? [In Q2, 2001, there were only 202 parcels of spaces available in the 5-10,000 sf range; only 173 parcels in the 10-20,000 sf range; and only 67 parcels in the 20-40,000 sf range.]

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 dan@TheSpacePlace.net.

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 12.3 million square feet is now on the market in San Francisco. The top 5 companies, all office leasing brokerage firms, control over 50% of the City’s vacancy! These brokerage firms are beholden to more than 300 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 5 companies on the list control more of the City’s vacancy than Shorenstein (#6); Tishman Speyer (#8); Boston Properties (#10); Equity Office Properties, the country’s largest REIT (#13); and more than Hines (#14). Surprised, are you not? In the cases of Studley and Staubach, our friendly tenant-representation competitors, they collectively represent ~300,000 square feet of space available in 17 different buildings. How can they objectively represent YOU, the tenant, if you choose to pursue any of their sublease space?!

% 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 15.7% 2,054,370 65
2 *Cushman & Wakefield of California 10.5% 1,365,979 87
3 *CB Richard Ellis 7.0% 911,773 56
4 *Colliers International 6.9% 896,979 91
5 *Jones Lang LaSalle Americas, Inc. 6.7% 878,772 29
6 Shorenstein Company, LLC 6.7% 871,417 13
7 *Grubb & Ellis 5.1% 667,330 66
8 Tishman Speyer 4.6% 598,800 4
9 *Cornish & Carey Commercial - ONCOR 3.2% 413,175 31
10 Boston Properties, Inc. 3.1% 401,493 4
11 *GVA Kidder Matthews 2.8% 365,980 29
12 *TRI Commercial / CORFAC International 2.3% 302,143 44
13 Equity Office Management, LLC 2.1% 279,732 10
14 Hines 1.7% 223,718 13
15 *Starboard TCN Worldwide Real Estate 1.4% 187,725 97
16 *Studley 1.2% 150,492 9
17 *The Staubach Company Inc. 1.1% 146,595 8
18 *Charles Dunn Company, Inc. 0.9% 115,545 23
19 *Johnson Hoke Limited 0.9% 112,770 17
20 The Presidio Trust 0.8% 107,920 45
21 Pacific Eagle Holdings Corporation 0.8% 99,858 2
22 *Strom & Associates 0.8% 97,934 10
23 *Ritchie Commercial 0.7% 96,938 41
24 *NAI BT Commercial 0.7% 96,110 25
25 *HC&M Commercial Properties, Inc. 0.7% 86,268 24
  All Others 11.7% 1,526,486
  Total   13,056,302  

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