Market Insight Editorial & Advice to Tenants: 2Q2007

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.

San Francisco Office Rents Plummet

Now we have your attention, with a headline worthy of your consideration. It’s been a while since we’ve posted a headline like this on our website. It won’t be much longer until market conditions win that headline again. “Headlines” are what you seem to have time for. I’ve been giving them to you for 25 YEARS. I’m not expecting an anniversary card from you, Tenants. But I do expect that you’ll read the headlines I’ve written—and try to click through to the extensive, thoughtful, strategic ADVICE given—to inform you, the Tenant community, and advance YOUR interests rather than landlords’. In every quarterly report we produce, we try not to waste your time with the empty narrative seen on virtually every one of our competitors’ sites…simply writing about the statistics. Rather, what does it all mean and what should you do about it?!

There are FAR more important discussions to explore than to just give you up and down arrows and pretty charts. For our part, you’ve been getting great advice from a 25-year office leasing veteran to improve your bottom-line occupancy costs—ranging from analyses of the local, national and global economies; to strategies to leverage negotiations with landlords; space programming and planning strategies; to operating expense issues and ways to monitor your landlord’s performance and accounting; to selecting the Team of professionals for brokerage (OUR forte), architecture, construction, furniture selection; a searchable database of Guest Columns—all educational articles for you; and much more. But these days, we’re all too jammed to read much. Or to check references and read letters of recommendation. Too many emails, IM, texting, cell phone, office phone disturbances. Access this information and advice in whatever way and timeline possible, starting with the HEADLINES. Dig a little and you’ll notice a voice unlike ANY you’ve heard in the tenant-representation community. I promise.

1Q 2007:

4Q 2006:

3Q 2006:

2Q 2006:

1Q 2006:

4Q 2005:

3Q 2005:

2Q 2005:

1Q 2005:

Credit Debacle Will Bite You, Too

The “news” about over-extended consumers and the ongoing credit-crush wasn’t news to us, here. I’ve written on this topic many times during the past several quarters. The New York Times lamented back to the S&L Crisis during the early 90s (a recessionary period), when the Resolution Trust Corporation—then one of our largest tenants in San Francisco—arose to handle that $300 billion problem in a $7 trillion economy. Now, however, defaults on loans have already taken a $2 trillion lost market capitalization bite out of our $11 trillion economy. The swath of damage will be far, wide and deep into the banking industry; Wall Street firms; hedge funds; the construction industry; commercial real estate lenderselopers; insurance and pension funds; we’re all going to feel this. Best of luck on your next re-fi. By the way, the corporate financing for the heinous Blackstone deal to purchase all of Equity Office Properties wouldn’t fly today. But you could have bought Blackstone shares at the IPO…and left about 34% on the table to present. Follow the deal-making fees and risk-shifting; the transactions are all about OPM (other people’s money). Who’s going to take it in the chin?

San Francisco Bay Area Foreclosures Soar—Effect on Office Space?

We’ll write about this until we’re blue, but as long as the consumer is king in this economy—an economy 2/3 driven by consumer spending—landlords and tenants should be mindful of the earthquake taking place in the credit markets. There won’t be ANY easy money for borrowers for the foreseeable future. No stated income loans which, according to our lending source, represents ~70% of all loans funded in San Francisco. No easy equity lines. Nothing but AAA loans. Shutting down the flow of easy money will take a huge bite out of already-inflated real estate pricing—both in the residential AND commercial sectors. And the downturn has just begun. DataQuick Information Systems reported that in Q2 more than 2,200 San Francisco Bay Area homes were lost to foreclosure—the highest number since they started counting nearly twenty years ago…and a 900 PER CENT INCREASE from the same period last year. Here we are, in the wealthiest zone in the nation, mired in debt, losing part of our consumer base. Another 7,700 San Francisco Bay Area homeowners received default notices, a 200 PER CENT INCREASE over last year.

Moody’s research is predicting a nationwide average decline of 7% in housing prices. Arguably, our locale will fare better than the national average, but San Francisco is not impervious to setbacks. The Dot-Bomb hurt everyone—across the board. It would be amusing if not so shocking to notice that landlords continue to raise their asking rents for space throughout the Bay Area. As tenant-representation brokers, our work is cut out for us. Careful planning, smart strategy, arbitrage and leverage is what it’s all about to negotiate the optimum terms for our clients. Not all landlords will respond in the same fashion. It takes hard work to orchestrate an effective competition for our client’s business. There’s more at stake today than ever in my 25 years of representing tenants.

Anatomy of an Overblown Market

There’s no confusion, here at Mihalovich Partners. The market is overbought and it’s been overbought for quite some time, with cheap dollars, cheap interest loans and frothy competition from the herd in the investment community. We recall our HEADLINE from 3Q 2005, “10 Billion Doughnuts Can’t Be Wrong”, all about the sugar-coated ideas which gained popularity during these past years of binge-buying of office properties. But the market keeps consuming doughnuts! Case in point:

With thanks to for the story…Nothing personal, but we believe Mr. Broe was drinking Blackstone Soup when he bought the old Gallo Salami Building at 250 Brannan. The building was sold, vacant, in 2004 at $14 million. Then, vacant still, in 2006 for $19.8 million. Finally, Broe picked it up this year—yes, still vacant—for $31.2 million. That’s a smooth move from $155/square foot to $345/square foot in just three years. But what upside is achievable? Capmark Finance (keep their number handy) has so far put in about $27 million and underwritten the loan with the expectation of $36 rental rates…which spells a future valuation of $43.5 million, or $481/square foot…a stratospheric value for a deep-SOMA building…more than Beacon Capital just paid for the Class A highrise, 600 California Street. Nevertheless, the lender will lend and some tenant-rep broker will convince their client that $36 is a “deal”.

VC, Private Equity & LBO Funds: Blessing or Curse?

If the lending paradigm is shifting rapidly, we’d better pay attention, don’t you agree? Undoubtedly, on a ground level basis, scores of tenants in San Francisco and the surroundings have been given life via outside funding. Office demand has surged during the past few years as a result. VCs are on pace for a record year in 2007, with greater funding than since 2001…nearly $15 BILLION for the first half of the year. When underwriting these tenants, VCs typically look for two to five-year lucrative payouts. So, if business-borrowing declines under the pressure of more expensive debt financing; and/or if consumer-spending declines, then what will become of so many of our tenants? If the source of capital is priced a couple of points higher AND more highly scrutinized, tenants will suffer and office demand will likely diminish.

On a larger scale, it is commonly acknowledged that Blackstone’s financing to acquire Equity Office Properties just months ago WOULD NOT be feasible in today’s financial environment. “Until now we were in a period where risk was underpriced”, according to NYU’s Professor of Economics, Nouriel Roubini, at its Stern School of Business. “Debt was so cheap”, he said, “that anybody could take a semiprofitable company private and leverage it. Now the price of this is going to be more expensive. There are some $200 BILLION of LBOs in the pipeline”. According to S&P’s Leveraged Commentary & Data, more than $460 BILLION of debt related to buyouts done in the past five years is currently held by investors and banks around the world. And when the music stops?

By the way, Blackstone just closed the largest buyout fund ever raised…at $22 BILLION.

Here are some choice words for the private equity community from Andy Kessler, author and former hedge fund manager:

“The dirty little secret is that private equity investors aren’t all that good. They take mediocre investments with lackluster growth but steady cash flow and add leverage to amplify the returns. One great move we saw from the PE crowd is Hertz: Immediately after investing, borrow $1 billion and pay it out as a dividend so the investing group can get their money out. All of a sudden, management will do anything to maintain or increase cash flow: Cut spending, workers, offices, factories and advertising, and with the tech companies now in play, cut R&D, their lifeblood. Don’t mistake financial engineering for company building.

“Damage the franchise? No matter. It’s still lucrative…There are transaction fees for doing the deal, monitoring fees to keep tabs on their investment, consulting fees, investment banking fees, and even termination fees when the company is flipped back to public investors. Why not accounting fees to keep track of all these fees?…Is there an economic purpose to all this? Sure, someone has to squeeze efficiencies out of lackluster businesses. But couldn’t management of public companies do this in the first place? Excuses of public market scrutiny or demand for quarterly results ring a little hollow. It’s just more lucrative to do the high-risk, high-wire act of going private.”

Explaining the Unthinkable Demise of Capital Markets

In 3Q 2006, we shared a terrific article with you entitled “A Requiem for a Housing Bubble (by Eric Sprott & Sasha Solunac of Sprott Asset Management)”. Don’t miss it this time. To round out an historical context of the ongoing credit crisis, with some stunning forecasts, read on to Martin Hutchinson’s “The Bear’s Lair—Anatomy of a Credit Crunch”:

The German bank IKB has been the recipient of an $11 billion bailout. $64 billion of leveraged buyout financings have been withdrawn in the last month. Standard and Poors have talked of down-rating Bear Stearns, two of whose funds have collapsed. We are clearly in the beginning phase of a classic credit crunch, and it’s therefore worth looking at how these have played out in the past, and where and how holes in the fabric of the world’s financial system are most likely to appear.

Credit crunches are relatively rare, rarer than stock market downturns. There was no credit crunch in 2000-02, though the stock market downturn was substantial. In 1989-92 there was a mild credit crunch in junk bonds and New England real estate, but relatively little spillover to other areas of the credit market. In 1982, there was a credit crunch in emerging market debt, which was eventually solved by a mass debt forgiveness and bailout of the New York banks which were most heavily exposed. Even during that period, there was no great credit crunch in the domestic U.S. market.

The last true credit crunch was thus that of 1973-74, which was particularly severe in Britain but spread throughout the international debt markets. That’s before the working lifetime of most market participants today. Sam Molinaro, chief financial officer of Bear Stearns said Friday that conditions in the fixed income market were “as bad as I have seen in 22 years”—since he is 49 he was presumably referring to his period of participation in the market rather than some hitherto obscure crisis in 1985, from memory a placid and bullish year. One can pause for a moment to mourn the length of institutional memory of 1950s London, where Morgan Grenfell’s chairman Lord Bicester served until his death in office at 89, thus being able to give his junior colleagues a first hand account not only of the 1929 crash but of its predecessors in 1890 and 1907.

It’s worth looking at how the credit crunch of 1973-4 developed.

Like the last few years, the early 1970s was a period in both Britain and the United States of rapidly rising money supply and asset prices, but with stocks still mostly below the level of a record-setting bull market a few years earlier. In the U.S., Federal Reserve Chairman Arthur Burns inflated the money supply by over 10% per annum during the years 1971-73, in order to lift the United States from recession and allegedly assist President Richard Nixon’s 1972 re-election.

In Britain, the Bank of England in 1971 ended quantitative credit controls and moved to a free market system, while prime minister Edward Heath abandoned control of both the money supply and public expenditure and embarked on a “dash for growth.” This quickly produced a real estate bubble, both in housing but particularly in office property, the supply of which was still somewhat restricted by the aftermath of World War II and the lengthy period of building restrictions that followed. Since the period was one of worldwide economic boom, commodity prices also soared, in many cases reaching levels they were not to touch again until after 2000; the first oil crisis, in which oil prices rose from $2 to $10 a barrel, occurred in October 1973.

The main difference between 1973 and now was inflation, which ran in the US at 6.2% and in Britain at 9.2% in that year. That reflected the worldwide increase in commodity prices, which was not offset by worldwide deflation through outsourcing. Interest rates in nominal terms were correspondingly higher than today and Britain in particular was running a tighter monetary policy, with Minimum Lending Rate rising from 11.5% to 13% as the crisis began in October 1973. However longer term rates were around zero in real terms, as today.

The credit crunch appeared through the London secondary banks, fairly similar institutions to today’s sub-prime mortgage lenders, albeit with their portfolios concentrated on commercial rather than residential loans. Rumblings appeared from this sector in the spring of 1973, and international bond market conditions became very difficult after June, but it was not until November 30 that the first secondary bank, London and County Securities, went into insolvency. However the cascade of bankruptcies that followed was rapid and very severe. By December 19 the Bank of England was organizing a “lifeboat” support package to preserve liquidity in the market and allow orderly liquidation of the fringe banks’ portfolios. At its peak the “lifeboat” had loans outstanding to no fewer than 30 banks, and there was fear at one stage that the gigantic National Westminster Bank would go under.

The British economy had two dreadful years in 1974 and 1975, with a miners’ strike, a 3-day workweek and a hard-left Labour government. The Financial Times share index dropped from its 1969 and 1972 peaks of over 500, and around 400 in late 1973 to a low of 150, a drop of 70% in nominal terms and a lower level in real terms than its nadir of 40.4 after the 1940 evacuation of Dunkirk. The credit crunch persisted until the end of 1975, lasting for around 2Ω years in all, and bankrupted most of the entrepreneurial financial institutions in the City of London, including notably Jessel Securities, a major fund manager, and Slater Walker, which until 1973 had been the pre-eminent financial innovator of its day.

Internationally, the British secondary banking crisis had initially only a moderate effect. The Eurobond market closed almost completely in December 1973, one of its last issues being the only Euro-financing ever done in Lebanese pounds—by the time the market reopened for such exotica in 1977 or so, Lebanon was engulfed in civil war. The syndicated loan market however remained open during the first quarter of 1974, since loans by this stage were made on a floating interest rate basis based on the London Interbank Offered Rate (LIBOR)—thus higher inflation did not automatically destroy their value. There was indeed a large amount of both supply and demand in the banking system, since the oil exporting countries of the Middle East for the first time built up multi-billion dollar balances, mostly held in US and British banks, while countries such as Japan found themselves with a huge oil-related hole in the balance of payments and a consequent need to borrow heavily.

The next leg of the 1973-74 credit crunch came with the bankruptcy of the medium sized German bank I.D. Herstatt, which took place on June 26, 1974. This would normally have caused only a modest ripple internationally, but the foolish German authorities closed the bank in mid-afternoon, while New York was still trading. A number of banks, including my own employers the merchant bank Hill Samuel, had entered into spot foreign exchange transactions, and had paid deutschemarks into Herstatt, expecting to receive dollars from Chase Manhattan, Herstatt’s New York correspondent. The dollars were never paid. This proved to be utterly destructive of international banking confidence; a period of illiquidity followed which was similar only to that after the Creditanstalt failure of 1931. Japanese trust banks, a highly solid and well behaved bunch, were forced to borrow at 2% above LIBOR for around a year, making their funding cost 2% higher than the best U.S. and European banks. The U.S. banking system also got into difficulties, with the Franklin National Bank, a major institution which had invented the bank credit card in 1952, being declared insolvent on October 8, 1974.

The U.S. and British economies went into recession in late 1973, dragged down by the combined effect of the credit crunch and the oil price spike, but the recession was fairly short-lived, ending in late 1974. Politicians were throughout unaware of the true position, as evidenced by the Gerald Ford administration’s switch from distributing “Whip Inflation Now” buttons to proposing a recession-fighting public spending package within the space of six weeks in late 1974, after the economy had already been in recession for a year. Indeed, the final major effects of the credit crunch, the bankruptcy of Slater Walker and the near-bankruptcy of New York City, did not occur until the autumn of 1975, while Cleveland’s default did not occur until 1978.

There are a number of lessons we can learn from this history about the credit crunch we appear to be entering:

  • Credit crunches very often occur after periods of excessive monetary expansion which appear to produce halcyon economic conditions of rapid worldwide growth, albeit with rising commodity prices. Check!
  • “Foreshocks” occur for some considerable period before the credit crunch, generally concentrated in areas where lending has been most vigorous. In the Latin American credit crunch of 1981-2, the market more or less closed for new lending at the end of 1981, but default did not occur until August 1982. Check—the sub-prime mortgage market went into severe difficulties in February.
  • Once a credit crunch hits, it inevitably spreads to other areas where lending has been aggressive, although it may take some months to do so. The international bond markets closed around the same time as the 1973 secondary banking crisis, but the loan markets did not close until several months later. The current crunch appears now to have spread to the LBO market; the emerging market debt market surely cannot be far behind.
  • The principal effect of a credit crunch is to dry up lending in general. Bank balance sheets and bond investors’ portfolios become constipated, with no room for new deals and an urgent need for repayment of outstanding loans and cancellation of commitments. In 1974, it became very difficult to get a “backstop” credit line for commercial paper issues, so even though the commercial paper market remained open (there being no real equivalent of the Penn Central collapse of 4 years earlier) issuance became impossible for all but the most liquid companies.

Sub-prime mortgages didn’t cause this to happen this time around, because they had mostly been packaged and sold to outsiders such as the unfortunate IKB. However the drying up of the LBO market is causing illiquidity at the heart of the system. In just a few weeks, the major LBO market lenders have provided transaction bridge financing (short term lending) totaling around $12 billion for the Chrysler LBO, $20 billion for Boots and $35 billion for Texas Utilities, to name only 3 deals. Long term takeout financing for all three transactions appears now to be unobtainable; hence major bank and investment bank balance sheets have suddenly become highly illiquid and concentrated in a few unattractive credit risks.

Assets become almost impossible to sell during a credit crunch, and trading books become ossified, with remnants of deals attempted years earlier remaining on them and clogging up liquidity. Bargain-hunters attempt to pick up equity and loan assets involved in the crunch at prices far below those of a year earlier, but the “bargains” are chimerical; most such assets end in bankruptcy as confidence never returns.

Credit crunches don’t typically end quickly; their effects drag on for at least a couple of years. During that period, credit is very difficult to obtain and even well-run solvent companies can find themselves in sudden difficulties. It is impossible to predict which companies will be forced to declare bankruptcy, but major bankruptcies there will undoubtedly be. One difference from the 1970s is the increased importance of trial lawyers and aggressiveness of prosecutors; if 2001-05 is anything to go by, bankruptcies will be followed by prosecutions of the managements involved, sequestrations of their assets and generally lengthy prison terms. Jeff Skilling’s fate in the U.S. has not been all that different to Mikhail Khodorkovsky’s in Russia, although his prison is probably somewhat warmer than the latter’s Siberian incarceration.

Stock markets and real estate markets will go into a lengthy period of illiquidity and quiescence, with price drops far in excess of those currently expected. In a period when credit is almost impossible to obtain, valuation metrics that depend on the use of credit quickly become worthless. US business is far more leveraged than in 1973; its decline in value will thus be correspondingly more intense. Only liquid companies in the liquid countries of East Asia, particularly Japan, and maybe the Arabian Gulf states are likely to be fortified by the experience.

Joyful prospect, isn’t it? But that’s what happens after a decade of fiat money run mad.

Martin Hutchinson is the author of “Great Conservatives” (Academica Press, 2005)
Details can be found on
Copyright © 2005-2007 David W. Tice & Associates. All rights reserved.

San Francisco Market Overview

The “Need” for New Buildings: Soaring Purchase Prices Chase the Cost of New Construction

How do the buyers of $9 BILLION worth of buildings in San Francisco justify paying as much as $775 per square foot for buildings like One Market Plaza?

  • They leverage the hell out of the purchase and finance with cheap interest money. Foreign funds are buying while the dollar is in the tank; $1.40 per Euro.
  • They bank on escalating rental rates—speculating that today’s San Francisco rates are “cheap”. They fabricate returns for currently vacant space, anticipating exponentially higher rates within the near term for space which, on average, has been vacant for 18 months.
  • They use Other People’s Money for the acquisition; charge exorbitant transaction fees for handling the purchase; and then, again, on the “flipping” of a portion of the building to another building; or simply hold onto the building for 2-3 years and “flip” the entire building. Who cares what price is paid, provided that fees are earned on the trade and the money is invested rather than being withdrawn by investors—only to be invested by a competing advisory group.

As the cost of replacement property—construction and development costs—have soared, so chase the buyers on the assumption that any “reasonable” purchase price below replacement costs represents a “safe” investment. However, what if there is NO DEMAND for new construction? What if the markets are already over-bought and over-priced? What if tenants literally cannot afford to pay the rents necessary to justify the ludicrous purchase prices being paid for properties? Whose problem would that be?!

Meltdown Nostalgia: Echoes of 3Q 2000

Perhaps this is wishful thinking, but the ongoing credit bubble from reckless lending—to us—is reminiscent of the good old JUNK BOND days of the 80s; the S&L Crisis, which cost only $300 Billion to patch; and other bubbles in takeover mania from issuing risky securities. But, alas, we’re Americans and it’s all-American to simply forget about it, suck it up and move on. The notion that more than $2 TRILLION of market capitalization already lost from the credit scandal will bring a shred of concern from the landlord community in San Francisco? Dream on, tenants. When the Dot-Bomb hit, it was only under the blade of an aggressive tenant-rep broker that landlords leased their $50/square foot asking rent space for $30. There will be little sympathy or recognition from landlords that the massive erosion taking place in the capital markets will affect their cash flow or grand expectations for rent. Back in the 3rd Quarter of 2000, our headline and story of the massive decline went this way:

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.”

Availabilities in San Francisco Soar Nearly 16% to 14.1 Million Square Feet

Availabilities in all other Bay Area counties rose as well. This is great news, Tenants! San Mateo County, up 1.5% to 6.1 million square feet; East Bay counties up 1.9% to 14 million square feet; and Santa Clara County marginally higher to 12.8 million square feet. ANY QUESTIONS?

Landlords and listing brokers will have you focus on a “Vacancy Rate” describing all space literally sitting vacant at this moment. But how honest a measure is that, if the calculation IGNORES all of the rest of the space available on the market for occupancy later this month, next or later in the year?! The San Francisco Bay Area now offers nearly 47 MILLION SQUARE FEET AVAILABLE. The TOTAL net absorption of space in the entire region for Q2 was NEGATIVE 272,000 square feet for direct/Landlord space; a modest, positive 172,000 square feet when considering sublease absorption.

San Francisco County results:

  • Direct (leasing from landlords) net absorption of space went NEGATIVE…AGAIN…to MINUS 581,000 square feet. When including sublease activity, total net absorption, Citywide, was NEGATIVE 479,000 square feet.
  • Total # of deals in Q2 was the LOWEST since Q2, 2005.
  • Direct square footage leased in Q2, 2007 was only lower in Q4, 2005; and Q1, 2002, prior.

San Mateo County posted its lowest # of deals since Q3, 2004.

East Bay Counties (Contra Costa & Alameda) reported the lowest # of deals in nearly TEN years, since 3Q 1997. Asking rates remained flat to slightly lower for sublease space.

In the South Bay (Santa Clara County), Direct (leasing from landlords) net absorption of space went NEGATIVE…to MINUS 215,000 square feet. Deal flow was the lowest since 4Q 2001.

A quick look at the “spreads” in rental rates is interesting. Consider average asking rent, fully serviced, Citywide (all classes of space) for each of the markets:

  • San Francisco County: $32.92 per square foot per year
  • San Mateo County: $31.13
  • East Bay Counties: $23.13
  • Santa Clara County: $23.80

Given an opportunity to secure office space at up to a $9.00 per square foot per year discount to San Francisco’s rates, perhaps City tenants should consider leaving the City’especially when considering other advantages, such as payroll tax relief; potentially lower housing costs; lower labor costs; avoiding the hassle-factor of building in the City…etc.

For those of you beginning to doubt the supply of space available, or the notion that space is still coming on the market’and what tenants wouldn’t, based on the hype from the landlord and investment community’note the amount of square footage which came online during the last 45 days of Q2:

  • San Francisco County: Added 1,800,000 square feet
  • San Mateo County: Added 350,000 square feet
  • Santa Clara County: Added 2,800,000 square feet
  • East Bay Counties: Added 2,500,000 square feet

Conflicts of Interest at The CAC Group; CB Richard Ellis; Cushman & Wakefield; Colliers; Jones Lang LaSalle; Grubb & Ellis; Studley; Staubach; and Other Brokerage Firms

Just another headline? We don’t think so. We’re constantly baffled by tenants who’d rather hire a landlord’s broker to represent them than a tenant-representation broker. Equally puzzling are those tenants who buy the argument that they can receive fair treatment from a large tenant-rep firm which professes to “control” a large percentage of tenant-deals in the City. Where is objectivity from the brokerage community?

Did you miss our headliner in 4Q 2005: “Ethics in Brokerage: Where is Eliot Spitzer?” How about Grubb & Ellis’ 1Q 2007 headline, “Rents, Prices Scream”, in which G&E states,

“It was not too long ago that $100 per square foot rents returned to mind like a mirage that seemed tantalizingly real. It’s this fond memory that’s helped drive sale prices above construction costs and prime rent to the cusp of the century mark…The outlook appears very favorable…With demand on the way, where else will rents go but up?” …For now, everything’s looking quite good. Even vacant space represents an opportunity for increased income generation rather than a worry.”

With this attitude, especially in print, you’d like this broker to aggressively advocate for the interests of your tenancy?

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 The CAC Group; Cushman & Wakefield; CB Richard Ellis; Grubb & Ellis; Colliers; or Jones Lang LaSalle—whom collectively represent over 54% of the 15.3 million square feet of space currently on the market. Those six firms have pledged their allegiance to over 300 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. CAC, C&W, CB, G&E, Colliers and JLL 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 25 years.

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

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 declined to 8.5%…a 6.6% decline…BUT the total amount of space on the market (vacant space added to all other space available for delayed occupancy) JUMPED 15.8% to 14.07 MILLION SQUARE FEET. 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 47 million square feet on the market (UP from 44 million in Q4, 2006). 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 still “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 San Francisco 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

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—are most entangled in landlord representation 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 13.3 million square feet is now on the market in San Francisco. Of the top 7 companies, six are office leasing brokerage firms, controlling 54% 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 brokerage companies on the list control more of the City’s vacancy than Shorenstein (#6); Tishman Speyer (#8); Boston Properties (#9); RREEF (#10); and more than Hines (#13). Surprised, are you not? In the case of Studley and Staubach, our friendly tenant-representation competitors, they represent 118,000 and 116,000 square feet, respectively, of space available in 16 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 13.7% 2,094,803 55
2 *Jones Lang LaSalle 11.2% 1,717,859 26
3 *Grubb & Ellis 10.0% 1,530,447 65
4 *CB Richard Ellis 8.7% 1,334,631 28
5 *Cushman & Wakefield 8.6% 1,307,665 63
6 Shorenstein Company 5.3% 802,141 13
7 *Colliers International 4.9% 750,591 73
8 Tishman Speyer 4.3% 656,739 2
9 Boston Properties 2.7% 419,538 4
10 RREEF America LLC 2.6% 400,000 1
11 *GVA Kidder Matthews 2.4% 373,489 26
12 *Cornish & Carey Commercial 2.4% 372,787 12
13 Hines 2.0% 308,411 7
14 *TRI Commercial / CORFAC Intl 1.9% 290,166 43
15 Fremont Development Funding Corp 1.6% 250,000 1
16 *Starboard TCN 1.4% 211,833 87
17 McCarthy Cook & Co 1.4% 208,256 4
18 *Studley 0.8% 118,302 6
19 Pacific Eagle Holdings 0.7% 107,176 2
20 *Ritchie Commercial 0.7% 103,799 39
21 *The Staubach Company 0.7% 102,194 10
22 *Pacific Union Commercial 0.6% 96,843 29
23 The Presidio Trust 0.6% 95,193 37
24 *NAI BT Commercial 0.6% 90,268 24
25 *Commercial Partners 0.6% 88,967 1
  All Others 9.4% 1,437,932
  Total   15,270,030  

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