Market Insight Editorial & Advice to Tenants: 3Q2007

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.

25th Anniversary: Mihalovich Celebrates Representing Tenants In The San Francisco Bay Area

“A noble cause.” This is what “tenant representation” has meant to me during the past 25 years…Advocating the interests of tenants; protecting tenants in arduous negotiations with landlords; leveraging the good name and creditworthiness of our clients to create maximum economic and lease concessions from landlords. Forming teams of experts for our clients—think tanks, if you will—to handle every aspect of the planning, strategy and execution of renewals or relocations. The markets have been good to us, and to our clients for the vast majority of those years, save the years during the dot-com and perhaps this past year when landlords have had the upper hand over tenants. I owe great thanks to many terrific clients—some of the largest and most prestigious of tenants the City has ever known—both for-profit and non-profit—and scores of smaller and as meaningful professional firms with whom we’ve done wonderful work together. We haven’t accomplished all of this by ourselves. Our teams always include the most talented of architects, general contractors, real estate lawyers and more—whomever it takes to address our client’s needs properly and effectively. I’ve never thought of our team members as “vendors” (an unfortunate term used by too much of corporate America). Rather, they are trusted advisors who will go to any distance to do the right thing for our clients. Once formed and bonded with our client, our teams outperform the market. Outperforming a client’s expectations—and our “competitors”—has always been a paramount goal. We are used to producing transactions which net our clients at least 10-15% higher concession value than “comparable” transactions negotiated simultaneously by others.

We are often unfairly “pegged” as a competitor within the office leasing world of C&Ws, CBs, G&Es, etc. Yet our approach to tenant representation is altogether different, thankfully, from these firms and our results for our clients are quite better, too. I did not aspire to, and do not run a sales organization. We avoid conflicts of interest with ferocity, so we never represent landlords or take on competing tenant assignments. Our firm will never employ brokers who compete with one another for commissions, since this would replicate the offensive “culture” of our “competitors” and not serve our clients’ interests. We do not profess to be all things to all tenants, yet we have access to a more broad selection of professionals than any of our competitors. We are not forced to “sell” only those people under our roof. What does our client need? Sometimes, frankly, they simply don’t know. But we’re here to help them figure it out with the right team and we’ll keep our sleeves rolled up as long as it takes.

I enjoyed another career for four years before venturing into commercial real estate. It was a job which required developing analytical and negotiating skills; and necessitated daily—if not hourly—assessment of moving markets and the development of an opinion about the markets, to shape corporate trading policy. The “hotline” on my desk could—and did—ring at any moment, with the head of trading asking for my detailed analysis and recommendations. Wouldn’t it be refreshing for more tenants to do just that? As a young man, I was given (earned, so they said) enormous responsibility and resources for the company…and managed to negotiate nearly $1 billion of contracts. That was a great start, back in 1978 (when $1 billion was worth something), which led me to pursue this trading career in commercial real estate…trading space! Here’s to the next 25.

10 Billion Doughnuts Can’t Be Wrong (From Mihalovich, 3Q 2005!)

“Appalling, isn’t it, that Americans produce ten billion doughnuts each year? You don’t need to be Dr. Dean Ornish to know that doughnuts can kill. Evidently, though, the health message isn’t quite as deafening and alluring as the PR from the other side of the board room. Doughnuts, like a lot of sugar-coated ideas, sell big-time. “Spin” works wonders. Why? Because people believe it and act on it. Does the proposition make sense and stand up to intense research? Oftentimes, not. But we buy anyway. Did you chase a dot-com stock or two? Well, the stock was climbing at a meteoric rate, so you bought it…and made money for a while. Until you lost it. The investment community is out there right now, armed with billions upon billions of investment dollars’shopping for trophy buildings, REIT portfolios, corporate buyouts’all with cheap-interest money; foreigners with cheap dollars; and banking on sugar-coating and repackaging these investments to deliver to your front door. Never mind that the numbers don’t make sense. It’s the sizzle, friends, that sells.”

Blind Leading the Blind

Where ARE the experts in our economy and in our industry? If you’ve been around long enough, you’ll come to notice that the person in the mirror is the one you’ll have to trust…in the end. Most of you, however, hardly have time to think. That includes CEOs, CFOs, COOs, Managing Partners of law firms, etc. So, you may find yourself relying upon “experts” who know about 10% more than you do. To whom will you listen, then? From whom will you take advice and trust with your livelihood?

Wall Street? (The folks who piled on corporate debt, albeit with cheap interest rate deals…and would now like you to forget their most recent disgrace, losses and write-downs of $30 BILLION during Q3)

Bear, Stearns? Merrill Lynch? Citibank?

Economist Ken Rosen? (He suggested that Bay Area housing could drop 5-10%, but outlying areas could tumble more than 20%…How does HE know? Why can’t Bay Area prices drop 15-20% and send us into a real estate depression?) The National Association of Realtors projects that new home sales will fall 24% in ’07 from ’06 levels…and in ’08 will drop by 34% from ’06 levels.

No sooner does the public wake up to the mess created by Wall Street and the lending community…the same lobbyists are right at work trying to convince us that the bubble has passed or that the bottom is near. Mr. Bernanke suggested that two Fed interest rate cuts in Sept/Oct should keep the economy from slipping further. “We have not calculated the probability of a recession”, he said. “Our assessment is for slower growth, but positive”. Interesting that Bernanke hasn’t run the numbers. Our opinion, written some time ago in this column on this topic: The risk of recession?…Are we not IN a recession?

Credit-Pandemic: More Bad News You’ll Soon Forget

The credit meltdown could cost our economy $100 billion…or $200 billion. No one knows, yet, that’s for certain. There are a myriad of certainties, however—many of them simply gory-bloody:

  • The commercial real estate markets will follow the economy. It’s the consumer and commercial tenants who will dictate the plight of the commercial real estate markets—NOT building owners—no matter how much landlords paid for their buildings. The market fundamentals will always prevail, over time. Temporarily, over-bought highrise markets are rife with deep-pocketed investors. But when consumers pull the plug on 70% of the economic engine in this country, then retail, manufacturing, marketing, advertising and the rest of the chain will follow. What is left to support current rental rates in office markets except “asking rates” and misguided tenants willing to pay more than they should? Interest rates must remain low to prevent a deep recession or depression—although clear signs of depression have appeared in some areas of the country. The dollar has been in a free-fall, and will remain depressed as long as interest rates maintain current levels of decline. Inflation, which we’ve argued in this column many times has been grossly under-reported by the Gov’t, is on the rise…which bites into consumer spending and hiring. Value of the dollar lost 14% vs. Euro in 2007; the dollar lost 23% vs. Euro since 2006; the dollar lost 48% vs. Euro since 2004. How about GDP forecasts for 2007? 2.1%, the lowest growth rate since 2002—when it was 1.6%
  • The published losses and write-downs in the lending and investment arenas are staggering. The press and legislators are transfixed over the subprime crisis. But 70 million American homeowners have adjustable-rate mortages turning within the next few years. The credit problem is far greater than a subprime blip. Will the end-investors sit quietly while returns tank? Hardly. Billion dollar lawsuits will follow. We’ll begin to hear more reports on the sea of leveraged acquisitions of commercial real estate around the country—acquisitions founded on flaky underwriting. What could be flakier than “conservative investing” in highrise brick and mortar based on rents which don’t exist in today’s market?
  • Taking the credit-crisis topic to another level, have a look at credit card debt: $915 billion of UNSECURED loans. Credit card losses. Is this ethical lending? According to Peter Gumbel of Fortune, “credit card debt is different from subprime debt…: Unlike mortgages, credit card debt is unsecured, so a default means a total loss. And while missed payments are at a historical low, they show signs of an uptick: The quarterly delinquency rate for Capital One, Washington Mutual, Citigroup, J.P. Morgan Chase, and Bank of America rose an average of 13% in the third quarter, compared with a 2% drop in the previous quarter. What’s more, consumers and the people who market financial services to them may not have learned their lesson…If there is an international precedent the U.S. should be watching, it’s actually that of the U.K. British consumers are just as overstretched as Americans, but since the real estate market there rose faster and fell earlier, they’re about 18 months ahead in the credit cycle. Since the last quarter of 2005, credit card delinquencies and charge-off rates in Britain have risen as much as 50%, forcing banks to take huge write-offs. It’s a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That’s suicidal, of course, given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it’s not a trend that crosses the Atlantic.”
  • Freddie Mac lost $2.3 billion in Q3…less power to prop up the failing economy. Once they reported the loss, their stock plunged 29%.
  • Fannie Mae lost $1.4 billion in Q3. Fannie shares dropped 25%, to their lowest level since 1996.
  • Countrywide Financial, the nation’s largest mortgage lender, needed a $2 billion infusion from BofA to float. Stock YTD down 82%.
  • ETrade, stock down 59% in the quarter, wiping out $2.2 billion in stock value. YTD down 84%.
  • Deutsche Bank wrote down $3.1 billion.
  • UBS wrote down $3.4 billion.
  • Bank of America wrote down $3 billion.
  • Blackstone: Stock is 18% off their IPO price this year, but 39% off this year’s high.
  • Boston Properties: 22% lower than during Q1 ’07, but 38% off this year’s high.
  • iStar Financial: 42% lower than during Q1 ’07, but 47% off this year’s high.
  • Bear Stearns: 38% lower than during Q1 ’07, but 46% off this year’s high.
  • Merrill Lynch: 34% lower than during Q1 ’07, but 45% off this year’s high. Merrill reported a loss of $8.4 billion during Q3.
  • Citigroup: 39% lower than during Q1 ’07, but 43% off this year’s high. Citi reported a loss of $6.5 billion during Q3 and warned of an additional $8-$11 billion of write-downs forthcoming. The nation’s largest bank could become a merger candidate.

“Peak Oil”: The Calamity Upon Us

Earlier this year, some of you learned of this phrase and began to pay attention. Of course the evening news drones on about the value of gallon of gasoline during ’07…and oil closing in on $100/barrel. But so what, since we’re paying only $3/gallon gas in US; Londoners pay $8/gallon! “Peak Oil” is not a fairytale, however. It is a state of the commodity which drives the modern world, at present. The German-based Energy Watch Group recently published a report stating that the world has reached the point of maximum oil output—Peak Oil—and that production levels will halve by 2030 and from now on will drop by approximately 3% per year.

“It’s a very serious result,” said Hans-Josef Fell, a German lawmaker from the environmentalist Green Party who commissioned the report. “I fear the world will come into a big economic crisis in the coming years.” The report warns that coal, uranium, and other key fossil fuels are also in declining supply. It predicts the fall in fossil fuel production will bring with it the threat of war, humanitarian disaster, and general social unrest.

CEOs, CFOs and Managing Partners: We’d like to know of your plans for employees when gasoline goes to $6 per gallon? Will you impose telecommuting? Will you pay to fit out your employees with home offices? Will you expect your employees to pay $1,000/month for a parking space? Can we prevent becoming victims of Peak Oil?

Author and noted columnist, James Howard Kunstler* put it simply ’ “the demand line has crossed the supply line ’ though that simple fact has many curious ramifications.” Among the most subtle is a theory out of Doug Noland’s latest Credit Bubble Bulletin (published every Friday). “There are literally trillions of dollars of liquidity sloshing around the world keen to hold ‘things’ of value. Liquidity sources include the massive central bank reserve holdings as well as funds at the disposal of the sovereign wealth funds. Importantly, the more apparent becomes U.S. financial fragility, the keener they are to stockpile real ‘things’…Indeed, it should be noted that this is the Federal Reserve’s first attempt at reflation where U.S. securities are not the speculators’ or foreign central banks’ asset class of choice… Not only is the pool of potential global buying power unparalleled in scope. It is fervidly attracted to tangible assets ’ as opposed to U.S. securities ’ and is highly speculative in character. At the same time, an unwieldy global boom is stoking unprecedented demand in China, India, Asia generally, and the other ‘emerging’ markets including Russia and Brazil. Throw in various weather related issues and energy production constraints and the prospect for some very serious bottlenecks and shortages has developed.” In short, foreigners stuck holding dollars that are hemorrhaging value would rather spend them on something other than dollar-denominated financial paper, and nothing is more crucial to the maintenance of industrial economies than oil. Noland’s theory comes on the heels of reported oil and gasoline shortages in China, bad enough to have caused some civil unrest ’ and bad enough for China’s leadership to want to spend some of its vast US dollar reserves bidding up oil prices in the open markets to quell that unrest.

This is nothing more complicated than hoarding behavior on a global scale, a mounting crisis of frightened self-interest that has already been well-described by investment banker Matthew Simmons. Simmons was only one of many analysts who spoke at the mid-October Houston conference put on by ASPO-USA (the Association for Study of Peak Oil) ’ to which The New York Times failed to send a reporter. Simmons has also said that the American public (and its leaders) will probably not “get” the fundamental problem with oil until rising prices are joined by spot shortages ’ i.e. gas station lines, which will represent hoarding behavior on the basis of individual motorists.

Behind the hoarding dynamics are several clear circumstances.

One biggie is the growing export crisis, described by geologist Jeffrey Brown. Countries like Saudi Arabia and Mexico that sell oil to importing nations like The USA and Japan are using more of their own oil and producing less. Mexico’s trajectory is so steep (due to the severe depletion of its giant Cantarell oil field) that it could easily go from being America’s Number 3 source of imports to zero in less than five years. The anticipated yearly growth in worldwide oil demand next year will equal 80 percent of the USA’s entire oil production.

The export crisis is only an additional layer on top of the general peak oil situation, but it illustrates the way that complex systems we depend on ’ and oil markets are one ’ are liable to wobble and fail just as the world comes off the all-time oil production peak for good. Finance is another complex system and it, too, is entering a stage of robust instability. Food production is yet another, with a grain scarcity that has driven wheat prices to all-time highs. The roster of complex systems entering phase change is long and gruesome.

Another big element behind rising oil prices is oil nationalism. The old “major” oil companies ’ Exxon-Mobil, Shell, BP, Chevron, et cet ’ now only account for about five percent of world oil production. The other 95 percent comes from nationalized oil industries like Saudi Aramco, Mexico’s Pemex, Petroleos de Venezuela, and Brazil’s Petrobras. Russia’s Lukoil and Rosneft are effectively state-controlled. Not only is worldwide oil in depletion (past peak) generally, but most of the remaining oil is controlled by entities that are inclined to both withhold (hoard) some remaining oil for their own future use and to direct whatever oil they do sell into places other than open auctions on the futures markets. Selling oil to favored customers will be an extremely potent instrument of geopolitics in the decade ahead, and is only one aspect of a desperate global resource contest that could turn ugly and violent. For the moment, though, its meaning for the US is that the two-thirds of our daily oil supply composed of imports is in jeopardy.

Another big element of the oil price story is the condition of the equipment used all over the world for getting it out of the ground, moving it around the globe, and refining it into useful byproducts like gasoline and aviation fuel. The world is woefully short of drilling rigs, and the cost of steel is way up. The demand for new equipment is out-of-sight. The existing worldwide inventory of equipment can be fairly described as decrepit. As Simmons points out, there is a frightening gap between the need for investment in new rigs, tankers, and refineries and the money available to just keep production at current levels. The outlook is grim. In fact, the worldwide lack of will to invest in oil industry equipment is itself a symptom of the crack-up of global finance as a complex system under duress. On top of the equipment problem is a human resource problem: the world us not producing enough oil technicians and engineers to keep up with production, let alone increase it, and every year another wave of senior specialists retires out of the system.

Beyond these parts of the oil price story are even more sub-plots, like the political strife in Nigeria that effectively holds its oil industry hostage, not to mention the fragile state-of-affairs throughout the Middle East, and dare we leave out the insane habits of America’s Happy Motoring utopia.

There is really no excuse for The New York Times and the rest of the mainstream news media to not understand what is going on out there. The pervasive cluelessness is a symptom of another complex system out of whack ’ the system that informs us what’s going on. Meanwhile, the danger mounts. The heating season is underway and the furnaces are clanking. Many Americans will have to start choosing whether to pay their mortgage, fill the tank of the Chevy Suburban, buy that brick of Velveeta, or pay the heating oil guy. It looks like China will be spending more of its accumulated dollars bidding up the price of oil (or making favorable contracts with foreign suppliers) instead of buying Freddie Mac bonds. The USA could not find itself in a less favorable position among all these forces roiling the scene. It certainly can’t afford to continue its pathetic pose of cluelessness.

* Kunstler’s latest book, The Long Emergency, published by the Atlantic Monthly Press in 2005, is about the challenges posed by the coming permanent global oil crisis, climate change, and other “converging catastrophes of the 21st Century.” The Atlantic Monthly Press also published his novel, Maggie Darling, in 2004. Mr. Kunstler is also the author of eight other novels including The Halloween Ball, An Embarrassment of Riches. He is a regular contributor to the New York Times Sunday Magazine and Op-Ed page, where he has written on environmental and economic issues. Mr. Kunstler was born in New York City in 1948.

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®

San Francisco Market Overview

(No One Likes To Hear) “We Told You So”. We Did.

In Q1 2007, we wrote:

With all the clarity of 20-20 hindsight, we can say that Dot-Com rental rates (and the ensuing heady hysteria) have returned to San Francisco. Fortunately, there has been no volume of over-the-top transactions closed’but true to form, landlords are doing their best to ramp up rates every week. But what does this froth and hype have to do with a crisis in the mortgage market? Everything…

In Q4 2006, we wrote:

  • 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…
  • 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…
  • 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…

In Q3 2006, we wrote:

  • Teflon Economy: Drinks On the House!
    The feeling around town is a bit intoxicating. Everyone is bullish! Businesses are booming! VC funds are flowing! Tenants have been signing expensive deals around town’over 600,000 square feet of net growth in Q3’well into the old dot-com range of $60+ per square foot annual rates. Asking rental rates are up for direct and sublease space’throughout the Bay Area’and the euphoria in the landlord community can hardly be contained. Tenants, just give it up, shall we?! If you paid $35/sf for space last week, well, get ready! It will cost you $40/sf this week! Everyone enjoys a good party. Even biotech made a splash in the City this quarter with FibroGen’s 240,000 square foot, $50+ deal with Shorenstein in Mission Bay. Tishman Speyer has broken ground on its new 555 Mission office building and just announced its plan to “green” a 700,000 square foot new highrise on 2nd Street. Never mind that it will take an average of $60-$65/sf rent to justify new construction and that the current average asking rate for Class A space is ~$39.50/sf (slightly higher than when I started in this business, in 1982). Also ignore that, on average, Class A spaces-just-leased sat on the market for 21 months. Build on!

    Dèjá vu, Tenants. An enormous wave of Kool-Aid drinking investors is ready to plow another $400-$500-$600+ per square foot into purchasing more of our highrises. Very deep in the pocket; very shallow on the market research to determine how much tenants can and will actually afford to pay for space. These will be your new landlords (if they haven’t come knocking already). Buyers are promising their investors rent increases of $10 per square foot per year within a few years; an additional $10/sf/yr just 3-5 years hence! Better be prepared, Tenants! Where shall we look around the country for an example of how much pain can be extracted from tenants? Local landlords say, “New York!” “$80/sf on average!” More Kool-Aid, please…and, yes, their numbers are incorrect…
  • Raging Inflation May Stifle Tenant Demand
    The Gov’s method of determining “Inflation” doesn’t do justice at all to what all of us are facing here in the San Francisco Bay Area marketplace. Low single-digits would be a godsend, but the harsh reality is that real inflation has been raging and it’s taking its toll on nearly everything we do. Business is competitive as ever. So, 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.

In Q4 2005, we wrote:

  • While Rome is Burning
    How shall we spell “OVERHEATED”? While we are impressed with the resilience, fortitude and tenacity of the tenant community in San Francisco, we remain concerned about a number of fundamental underpinnings of the economy. It’s difficult to ignore this list, readers, yet our impression is that businesses throughout the Bay Area are doing just that. To our point of view, office demand has hardly noticed the potential impact of the following elements…

Deal Flow Throughout SF/Bay Area Trickles to Dot-Bomb Levels

San Francisco:
Q3 had the lowest # of transactions in 6 years, since Q4, 2001.
Q3 also had the lowest square footage leased in 6 years, since Q3, 2001.

San Mateo County:
8 of the past 9 quarters experienced positive growth, BUT…
Q3 had the lowest # of transactions in the past 5 years!

Santa Clara County (Silicon Valley):
NEGATIVE ABSORPTION (negative demand)
Q3 had the lowest # of transactions since Q1, 2001.
Square footage leased was lowest since Q1, 2001.

East Bay Counties (Alameda/Contra Costa Counties):
NEGATIVE ABSORPTION, the 4th quarter of negative absorption since Q1, 2006.
Q3 had the lowest # of transactions in more than 10 years!
Q3 had the lowest square footage leased in more than 10 years!

According to Real Capital Analytics, U.S. office building sales fell 70 percent in October from a year earlier, yet another sign the credit crunch that began in the U.S. housing market has spread to the commercial real estate market.

The average real-estate fund investing primarily in the U.S. has lost 17.2% over the past three months and is down 16.5% so far this year, according to Morningstar.

The average global real estate fund—which will invest both in and outside the U.S.—has shed 15.2% over the past three months and is down 10.3% since the start of 2007.

Look Who’s Selling!

Shorenstein, Swig and Weiler. A real milestone of a sale, too, considering that these partners have owned two core Central Business District development sites in San Francisco for more than 25 years. So, why would committed local developers/owners decide to sell 350 Bush and 500 Pine…combined 400,000 square feet of office development? The purchase, for the new owner—Lincoln Property Company—means an all-in cost to develop of ~$750 per square foot. Lincoln will probably need $75+/sf/year in rent from incoming tenants to justify the project. I’d like to see which of you, tenants, will stand in line to pay that freight? Shorenstein/Swig/Weiler saw no such line and took the money and ran. And why not? There are far better opportunities elsewhere…outside San Francisco. The sellers didn’t see the lines forming at Tishman Speyer’s new-and-still-100%-unleased 555 Mission or at the tops of buildings where building owners have been sitting idly for many months awaiting the $80-$100 rents which haven’t materialized. Other new developments, like Lowe’s 500 Terry Francois (in Mission Bay) have been sold—still empty. The sellers have visual acuity: They saw the market declining and made the sale. As for Lincoln? Think OPM. Lincoln doesn’t need the market to pay them a development fee.

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, Q3 vacancy rates declined to 7.4%…a 12.9% decline…BUT the total amount of space on the market (vacant space added to all other space available for delayed occupancy) declined only 4% to 13.47 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 46.4 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—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 that 14.4 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 Tishman Speyer (#6); Shorenstein (#8); RREEF (#9); Hines (#12); and more than Boston Properties (#14). Surprised, are you not? In the case of Studley and Staubach, our friendly tenant-representation competitors, they represent 136,000 and 121,000 square feet, respectively, of space available in 15 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% 1,971,660 52
2 *Jones Lang LaSalle 12.0% 1,721,630 27
3 *Cushman & Wakefield of California 10.4% 1,496,346 67
4 *Grubb & Ellis 10.1% 1,457,682 65
5 *CB Richard Ellis 8.8% 1,260,885 30
6 Tishman Speyer 4.5% 650,340 2
7 *Colliers International 3.8% 552,305 72
8 Shorenstein Company 2.8% 403,153 12
9 RREEF America LLC 2.8% 400,000 1
10 *GVA Kidder Matthews 2.5% 361,532 27
11 *Cornish & Carey Commercial 2.5% 354,339 18
12 Hines 2.3% 335,107 7
13 *TRI Commercial / CORFAC Intl 1.9% 278,017 42
14 Boston Properties 1.8% 264,461 4
15 Fremont Development Funding Corp 1.7% 250,000 1
16 *Starboard TCN 1.6% 224,406 87
17 McCarthy Cook & Co 1.5% 218,358 4
18 *Studley 0.9% 135,537 9
19 *The Staubach Company 0.8% 120,776 6
20 The Presidio Trust 0.8% 113,271 31
21 *Ritchie Commercial 0.8% 108,238 39
22 *Newmark Knight Frank 0.7% 104,429 9
23 Cushman & Wakefield, Inc. 0.6% 97,936 NA
24 *Commercial Partners 0.7% 88,771 4
25 Pacific Eagle Holdings 0.6% 80,775 2
  All Others 9.3% 1,341,275
  Total   14,391,229  

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