Market Insight Editorial & Advice to Tenants: 4Q2007

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.

Landlords On Thin Ice

We called the recession, here, quite some time ago and are looking for great opportunities for our clients and the rest of the tenant community to bring leverage to bear. Notwithstanding anything you’ll hear from your landlord, the San Francisco Bay Area economy is NOT impervious to the historic collapse of the financial markets now being witnessed. But just as Wall Street prematurely leaped to its feet to state that “the worst is over”, landlords and their brokers are quick to assert that the markets will bounce back at least as vigorously as they did after the Dot-Bomb period. Well, that just ain’t so.

Unlike the Dot-Com period, the ongoing credit and housing crisis has a far deeper and wider swath of damage in its wake—and has been brewing for decades. The losses to businesses and individuals are staggering…and will continue to unfold during 2008, 2009 and beyond. We know from experience that the repurcussions of many a disaster (Enron, WorldCom, Exxon Valdez) are delayed until appeal after appeal after appeal. Justice will finally be done to those who have mismanaged and misled, but the bleeding continues and 2007/2008 will go down in the books as a recession which leveled an already weak economy.

According to Standard & Poor’s, the world equity markets lost $5.2 TRILLION just in January of 2008. Robert Reich, Professor of Public Policy at the Goldman School of Public Policy at the University of California at Berkeley, explained the pandemic this way: “Nobody knows how big the losses are likely to be when the bottom is finally reached. And precisely because nobody knows, nobody wants to lend any more money. A rate cut won’t change this.” In his article, “The Politics of an Economic Nightmare”, he contends, “How much worse can it get? The housing bubble drove home prices up 20% to 40% above historic averages relative to earnings and rents. So now that the bubble is bursting, you can expect prices to drop by roughly the same amount, and new home construction to contract…A managing partner of a large Wall Street financial house told me a few days ago the scenario could get much worse. He gave a 20% chance of a DEPRESSION.”

Reich continued, “In reality, the crisis is both a credit crunch and the bursting of the housing bubble. Wall Street is in terrible shape and Main Street is about to be in terrible shape. And there’s not a whole lot that can be done about either of these problems—because they are the results of years of lax credit standards, get-rich-quick schemes, wild speculation on Wall Street and in the housing market, and gross irresponsibility by the Fed, the Treasury and the Comptroller of the Currency…We’re going to need the rest of the world to bail us out.”

“It’s Going to be Much Worse”

Fortune heard these words from famed investor, Jim Rogers, in their interview with him. “Conceivably we could have just had recession, hard times, sliding dollar, inflation, etc., but I’m afraid it’s going to be much worse. Bernanke is printing huge amounts of money. He’s out of control and the Fed is out of control. We are probably going to have one of the worst recessions we’ve had since the Second World War. It’s not a good scene.” Rogers went on, “Think about the story of gold in the ’70s. Gold went up 600% and then it started correcting. It went down nearly every month for two years, nearly 50% from the high point. And everybody said, ‘Well, that’s the end of the gold market. It was just a fluke. It’s over.’ It scared everybody out. And then gold turned around and went up 850% from that level. This is what happens in markets. But the fundamentals of the secular bull market in commodities are not over any more now than they were for gold in the ’70s.”

Bay Area Foreclosures: Toll on Spending

According to DataQuick Information Systems, Bay Area homeowners lost 11,530 homes to foreclosure in 2007, nearly half of which were lost in Q4. Lenders repossessed over 84,000 residences in California in 2007, 600% greater than in 2006. Spending will decline dramatically as a result…and drag on our local economy. But not everyone in the commercial real estate markets is running away scared. As one of our local investors put it to the press, “Most of the people who have bought properties in the last couple of years are well capitalized and they aren’t going to prove themselves wrong in the first six months of ownership. Their attitude is, ‘If I’m wrong, let the market tell me I’m wrong a couple of years from now’.” Wow, that sounds like riding a losing position, but when it’s other people’s money on the line, why worry? Did we mention that bankruptcies soared 40% in ’07?

Jobs Lost, Gone Negative

Here’s an old theme, for us, but it’s worth mentioning repeatedly: The national job scene hasn’t been healthy for a long time. But we’ve grown accustomed to lousy numbers, so our expectations have been lowered. During previous Presential elections, the public was advised by the candidates of both parties that 250,000 new jobs each month represented “healthy” growth in our economy. According to he Bureau of Labor Statistics, in only 7 of the past 32 quarters have we seen the new job count exceed 250,000 per month. The average in 2007 was 95,000 per month, although the rate tapered off during Q4 and actually went negative in January, 2008.

Function of the Market: What Comes Next in this Economy?

Those of us who study markets, arbitrage and economics have at least one thing in common: We’re always working toward creating equilibrium in the market. Equilibrium, after all, is that temporary state when supply and demand reside in happy matrimony. But equilibrium never lasts long and therein lies the opportunity to capture an imbalance…at a profit. As we speak, hedge fund managers, bond traders, grain traders, investment bankers, venture capitalists, auto manufacturers, retail bankers…everyone with an economic agenda…is examining their prospects to determine: What’s next? What must the market do to correct itself? What must I do to bring the market into equilibrium, to maximize my position in the marketplace?

In this economy, stocks will decline to values that finally entice buyers to buy. Of course some stocks have been hammered far worse than others, so the “opportunity” or “function” one performs might be to spread—or buy one opporunity with the greatest upside potential and simultaneously sell another, as a hedge, with the greatest downside potential. Simple, isn’t it? This is the commerce that makes the world go round. Finding equilibrium.

Interest rates are historically low. But they’re not cheap enough if people aren’t borrowing. And the spreads aren’t profitable enough for lenders to lend…until the Fed cranks them lower, still. Could we see a Fed discount rate at ZERO%? We could. One should never say “never”; markets will do what markets must do to correct themselves. At the hands of our credit crisis and weakened economy, the dollar has plummetted in value…but how can the Fed and our economy afford to hold interest rates steady? Consumers have run out of spending money. Higher interest rates will bury the markets further; some areas of the country appear to be in depression-mode already.

The cost of oil…or gold…knows no ceiling, as the price of these commodities reflect current and projected supplies (see our previous position paper about Peak Oil) and nervous anticipation. Will we eventually pay $8.00/gallon for gasoline as they are right now in London? Of course. Have we priced that eventuality into our economy? Of course not.

But here in the sunny San Francisco Bay Area, tenants should be concerned that their transactions be negotiated by those brokers who are skilled at arbitrage—skills in addition to their ability to manage people, the complex leasing process and provide objective counsel. We’ve learned during previous blowouts in the economy that those “experts” who’ve contributed to engineering the demise were doing little other than manipulating Other People’s Money (OPM). They had no skin in the game. Oftentimes, it is purely high-level salesmanship enticing unsuspecting Main Street investors with a pig of a “deal”, perfectly perfumed. So, which brokers in the City will most assertively extract concessions from the landlord in a declining market? A broker specializing in representing landlords? How can that be. A broker working in a sales organization, whose primary objective is to generate the greatest fees from the largest number of transactions within the calendar year? How will you, tenants, best be served? This begs the question, “Will commercial tenants benefit from a softening in the economy in a timely and aggressive fashion, when most of the brokerage community is motivated to get deals done ASAP and move on to the next client?” There is a critically important function to perform for tenants in this marketplace; is the brokerage community up to the task?

How Expensive, Money

If you don’t believe that the credit and housing crises have a direct impact on the commercial real estate markets, stop reading right now. Otherwise, consider this: Historically, interest rates are cheap. On the other hand, the cost of leverage required to borrow money in this country has spiked. The combination? A horrifying mess. The mortgage markets have morphed so dramatically over the years that we hardly paid attention when “stated loans”, or “neg-am loans”, or “interest-only loans” became the norm. Why did the industry create these products? To create leverage. And what an awesome job they did. The flexibility to leverage, to suck out existing equity on a re-fi, to leverage a lot to buy a lot with little down…the new American Way. Who can afford a conventional 30-year loan any more? Here’s an example to consider:

If your average Joe can no longer afford to make his current interest-only payments of 5 3/8% (it’s interest-only; there’s NO payment toward the principle), or simply prays that someday soon —if fully amortized rates drop enough— he can shell out the same amount of dough each month but get an old, typical 30-year loan…to what level would rates need to drop to allow Joe to borrow and pay principal + interest…keeping his monthly payment the same? Ready? About 3.48%…a 54% drop in rates! Is this where the market is heading? Perhaps, folks. Could we see jumbo rates drop from today’s 7% to 3.48%? It’s possible if that’s what’s needed to turn the economy around.

Path of “Least Resistance”: To Exercise a Renewal Option or Not?

[Conclusion: In our opinion, the entire process is a loser. This type of gambling does not constitute astute fiduciary duty to one’s shareholders. Our clients enjoy their financial stature resulting from years of hard, smart work and planning. In an open market transaction, we can negotiate an outcome to a renewal transaction of far higher quality than through the typically contrived and manipulated “Fair Market Rent” renewal option provisions and arbitration process. Our clients have leverage and we know how to use it. Exercising renewal options simply leaves a lot of money—and time—on the table. And we hate leaving money on the table.]

Face it. Landlords hate giving tenants options of any kind. Whether options to renew; to expand or contract; to terminate one’s lease; to assign one’s options to another tenant, etc. However, a tenant with some leverage will command enough respect to lock in some options—unilateral options. The question is whether or not a tenant is well served by exercising some of those options—versus negotiating around the options in new, arms-length, open discussions with the landlord. Few tenants exercise these options. And for good reason.

As tenant-representation specialists, we pride ourselves in creating as much flexibility for our clients as possible…taking careful note of our client’s needs at the formulative space programming stage of strategic planning. For discussion purposes, we’ll focus here on Renewal Options…the criteria which leads to exercising a renewal option; the viability of those options; and the practical reality of exercising a potentially irrevocable option.

  • At the inception of a lease, why do tenants bother negotiating renewal options? We expect longevity in our businesses, certainly beyond the initial “fixed” term of the lease. So, we want to encumber the Premises for some additional period or periods. The underlying assumption is that without an option to renew, the landlord will either lease your space to another party without any obligation to you whatsoever; or potentially option your space to another party…putting you into 2nd place (or worse) for a crack at leasing your own space! In either case, a lack of trust in the landlord drives the requirement for a renewal option—even though it would likely be in the landlord’s best interest to extend your coveted tenancy anyway! One simply can’t count on the landlord to do the “right thing”. But these renewal options are VERY complex, to the point that the tenant, landlord, brokers and real estate lawyers work arduously to craft “Fair Market Value” or “Fair Market Rent” terms in the final lease document. In spite of all the efforts, are these renewal clauses ever perfect? Far from it.
  • During the negotiation of general business terms of the Letter of Intent, Tenant and Landlord strike an agreement for a renewal option—with myriad conditions and complexities. On the face of it, the notion that—once exercised—the tenant’s renewal lease term will continue at “Fair Market Rent” for comparable space in comparable buildings. And, if the parties can’t amicably agree to the new rate within a reasonable period of time, a “baseball-style” arbitration ensues. This sounds easy enough, but let the buyer (that’s YOU, tenants!) beware:
    1. Once you’ve exercised your renewal option, the normally advantageous leverage of open negotiations evaporates. The parties are relegated to interpreting imperfect language of the lease to determine what’s “fair”.
    2. The artificial timeline described in the renewal option sets both parties to a schedule to reach an agreement, yet this timeline most often serves one side or the other with unfair advantage. Tenants must give written notice to exercise, frequently 12-15 months in advance of the renewal term commencement date. Unfortunately, this timing for a final and binding decision by a tenant usually coincides with the beginning of most tenant’s drive into the marketplace to determine the value of their tenancy to a small field of landlords. Most tenants are ill-prepared to make such an enormous commitment to a renewal so far in advance of the new term. And, not surprisingly, prospective outside landlords are rarely prepared to offer aggressive concessions to all but the largest tenants so far in advance. If a tenant must exercise a renewal option 12-15 months in advance, then to consider relocation alternatives instead, a tenant would likely have to receive binding commitments from an outside landlord 16-18 months ahead. Unlikely to occur.
    3. Many other challenges dilute the effectiveness of the renewal option. Once the tenant submits its notice to renew, the renewal clause will have offered the landlord a period during which they will formulate their “reasonable” opinion of “fair” rent. After all, it’s so far in advance of the new term, the landlord needs some time to contrive the most hideous of lease comparables—those recently completed transactions—which in the landlord’s view are fitting with the definition of “fair” in the lease. We cannot describe in this writing, without volumes, how manipulative the “comps” data becomes. Remember that lease transactions are NOT recorded, publicly. Lease transaction data is often shared between landlords, landlord-brokers and tenant-brokers—but nevertheless the data is founded on heresay and is often reported incorrectly. Does the landlord have an obligation to share its data and substantiate its claim of “fair” rent? Most frequently, not. The standards of the lease, however, are founded on the spirit of good faith and fair dealing. Is the door open for the parties to “cook” the “Fair Market Rent” clause? Absolutely. Isn’t there great risk to the tenant, to our clients, subjecting oneself to such a process? Absolutely.
    4. At the time both Tenant and Landlord strike the initial lease deal, in all likelihood market conditions will be quite different than when the renewal option is exercised. Yet the “standard” for renewal options bases “Fair Market Rent” on an “as-is” renewal for the period. No tenant improvement allowance is offered; nor downtime for construction; no allowances for architectural fees or moving expenses related to any phased renovations of your space; oftentimes brokerage fees are excluded. But the lease language may suggest that “fair” rent will take into account some or all of these concessions, if granted in the comparable transactions in comparable buildings. By this juncture, however, the leverage that a tenant would otherwise maintain to negotiate such allowances for a renovation—or lack of renovation—is severely diminished. Your ability to secure offsets from your current landlord becomes a function of concessions given to other tenants…in deals negotiated by other brokers.
    5. We must underscore the likely pitfalls of subjecting one’s financial future to outside “comps” at all. Not only are there authorship issues, insofar as we are likely to negotiate better terms for our clients than other tenant-representation brokers; but the notion that a tenant MUST rely on deals already completed signals a locked-in loss for tenants in a falling market. Why would a tenant voluntarily subject itself to setting a “fair” rent for the renewal 12-15 months hence (in a declining market) based on deals gone by?! Conversely, in a rising market, tenants should expect landlords to manipulate the comps to reflect only the most recent and most expensive comps…if there even exists an obligation for the parties to provide comps. Most renewal clauses are drafted in a manner which only obligates the landlord to propose “Fair Market Rent” in their reasonable discretion. In a rising market, if a single tenant in a single comparable building pays an agregious amount of rent…you can expect to hear from your landlord that that is the “fair” amount. Is the process contrived? Yes!
    6. For those of you, tenants, who were attracted to your current space because once upon a time your landlord was under pressure to rid itself of an extended vacancy; and/or due to an unusual configuration of the space, perhaps inefficiency…beware that the landlord’s view of the same space will change markedly during the determination of “Fair Market Rent” in a renewal! Once the tenant has locked into its renewal term by exercising its irrevocable option, the games have begun. All the reasons the space sat idly on the market for months or years before you signed on are forgotten. The concessions the landlord made to you at the outset of your lease, because no one else seriously considered that space…all forgotten. With 20/20 hindsight, one of the most masterful concessions to have secured in your renewal language would have been the tenant’s right to rescind its exercise of the renewal option—if and only if the landlord’s estimate of “Fair Market Rent” is unacceptable to you. Of course few landlords care to offer this option to rescind, since…in the landlord’s view…the tenant’s unilateral right to renew is deemed to be more than sufficient consideration given.
    7. In the “devious” category: “Fair Market Rent” means fair market rent for whom? Is the issue, “What will the market bear for this space, given its as-is condition for the specified length of years, considering comparable space in comparable buildings?” In other words, is the issue, “What will any ready, willing and able tenant be willing to pay…?” Or is the issue, “What should THIS tenant pay for its specific use in this made-to-order space for THIS tenant?” The notion of “market” and fair determination of value must be determined by considering what a reasonable field of tenants would be willing to pay for such space.
    8. How does one determine the value of an albatross? If a space is so unusual that its salvage value upon re-leasing to the open market is ZERO (ie. the space will necessarily have to be demolished and rebuilt in order to re-lease the space), then the utility of the space, or lack thereof, must be considered as “Fair Market Rent” is determined. But in the contrived world of renewal-option clauses, landlords may surprise and disappoint you with distorted interpretations of basic English. Generally speaking, if the space looks and smells like a pig (you leased the space because it was a “steal”), it will be slaughtered once you vacate to another location. On the renewal, however, expect the landlord to perfume that pig. It’s in their interest to do so and you’ve just locked yourself into the renewal. Again, buyer beware.
    9. The games continue, ad nauseam. Tenant exerices the renewal option. Landlord floats their initial “reasonable” rental rate. Shock sets in. Why? Because the landlord refused to entertain any discussion about forecasted rent prior to the tenant exercising its option. After all, the tenant controls the renewal term, not the landlord. The landlord offered to discuss renewal terms, but only after the expiration date for the tenant to exercise its renewal option. The landlord’s shocking salvo appears just at the time the parties are to enjoy one another’s company in a 30-day (or so) period of “negotiations”. If the parties can’t agree to terms, or simply don’t want to, this period will lapse without progress. Typically, what ensues is another debate—this time between representative-brokers or appraisers of Tenant and Landlord. Surely they will resolve the mess, or else! Or else what? Or else both parties risk turning over complete control to a 3rd broker or appraiser, whose qualifications are known but oftentimes little more as to how that person will actually resolve the dispute between the parties. Again, one must rely on the negotiated and imperfect language of the lease to spell out the role and process for the 3rd broker/appraiser. Even if the process were perfect, tenants, how can this contrived process result in a conservative and controlled determination of your company’s financial future?
    10. The reliance upon “baseball arbitration” gives comfort to many a tenant and landlord. In the end, however, the parties resort to gambling—albeit “educated” gambling. In spite of any and all previous discussions, negotiations, offers or otherwise, each party resorts to putting a number into a sealed envelope and submits it to the 3rd broker/appraiser. Everyone second guesses the other, including second-guessing the 3rd broker/appraiser. Either the landlord or tenant loses; or both can lose, actually. In our opinion, the entire process is a loser. This type of gambling does not constitute astute fiduciary duty to one’s shareholders. Our clients enjoy their financial stature resulting from years of hard, smart work and planning. In an open market transaction, we can negotiate an outcome to a renewal transaction of far higher quality than through the typically contrived and manipulated “Fair Market Rent” renewal option provisions and arbitration process. Our clients have leverage and we know how to use it. Exercising renewal options simply leaves a lot of money—and time—on the table. And we hate leaving money on the table.

The Cost of War, Revisited by Notable Economist

Lawrence Linsey, former Chief Economist under President George W. Bush, famously provided early warnings of the prospective costs of waging a war in Iraq and Afghanistan. Three months later he was the butt of White House frustrations. In a recent interview with Fortune magazine, he provided a sobering update. “The war has not been economically ruinous”, he said. “The bill for Iraq over the past five years is now approaching a cumulative $500 billion, or about $100 billion per year on average.” He continues on with his justification for the expense. “To make a fair estimate on this scale, one has to consider the costs of the alternative which in this case was leaving Saddam Hussein in power, as well as the possible benefits toward which we’ve made a huge down payment. Economically, what matters in a war is whether you win or lose. It is as simple as that.”

Linsey continued. “The Vietnam War cost between 1.5% and 2% of GDP each year during the eight years of major American commitment, or about $600 billion…I assumed the war could take as long as 2 Ω years, which led me to my upper estimate of $200 billion. One can argue about whether this or any other expenditure is a wise one, but any expenditure of this order of magnitude is simply not going to roil the domestic economy.”

“In 2006 economists Linda Bilmes and Joseph Stiglitz estimated that ’the true costs may exceed $2 trillion,’ including a major increase in the cost of oil…While many of those costs can reasonably be connected to the war, some of them are dependent on so many other variables that it enters the realm of the cosmic to tie them all together into one price tag. Simply adding up the costs doesn’t reach a sum that tells you on its face whether the war is worth it. Moreover, a 15-year cost estimate needs to be compared with 15 years of economic output, which will total $300 trillion.”

Macklowe Happens

Harry’s flip has flopped. That is, according to the Wall Street Journal, Macklowe stood in the way of an oncoming train (Blackstone) and got crushed. EOP sold several Manhattan buildings to Blackstone, who flipped them to Macklowe just last year for $7 BILLION. Harry put down only $50 MILLION, borrowing the balance from Deutsche Bank and Fortress. The loan came due; Harry’s turned the keys over to Deutsche Bank. Are there similarly leveraged deals in the San Francisco Bay Area? Perhaps. But we’ll likely not hear about them until it’s too late; just like the sub-prime details.

San Francisco Market Overview

Quake in the City

All things considered, San Francisco concluded 2007 with positive net growth and average asking rental rates up ~$4 per square foot per year over 2006, to ~$35.65/sf/year, fully serviced. Nearly half of the year’s absorption, however, came in Q4. Deal flow, as in Q3, slowed to Dot-Bomb levels; only 363 deals Citywide. Spaces leased sat on the market an average of 18.8 months. Did you hear that? Vacancy rates have remained in the 9.0-9.9% range since Q4, 2006, and are likely to climb substantially through 2008. Asking rates have already flattened out; taking rates are on the decline. We would not be surprised to see average rates decline by $5-$10/square foot/year in 2008.

San Mateo County, where spaces sat around for 17.1 months before getting leased, managed a year-long impressive 1.5 million square feet of positive absorption. However, Q4 net absorption completely tanked to only 37,000 square feet. The vacancy rate has edged up to 11.8%. Relative to neighboring counties, San Mateo’s rise to an average rate of $39.15/sf/year (up over $10/sf/year from ’06) has squashed its advantage and sent its absorption levels south. Yes, tenants let their feet do the talking.

Similarly, the South Bay (Santa Clara County/Silicon Valley) reported a healthy 1.3 million square feet of positive growth during 2007, but barely edged 1,000 square feet of growth during Q4. It’s been all downhill after Q1, 2007. Once the stats are completely settled, we’ll see that Santa Clara County went into the red during the last three quarters of the year. Spaces sat, on average, 15.3 months before being leased. Vacancy rates have risen four quarters in a row, to 10.2%. This in response to economic conditions…and a $6/sf/year rise in rates over 2006.

Contra Costa and Alameda Counties reported 790,000 square feet in the black for 2007, with ~200,000 square feet of its positive growth in Q4. Spaces sat on the market for 15 months prior to leasing. Vacancy rates, at 11.8%, have edged up three quarters in a row.

Goldman Sachs: 15-20% Plunge Ahead

Wall Street, which I’ve often commented is the largest and wealthiest lobby on the planet, says that the worst of the write downs is over. We can breathe easy again and start spending! More specifically, Bear Stearns’ (whose CEO recently departed after writing down a few billion of their own) chief investment strategist suggested that $125 billion-$175 billion losses to financial firms is all she’ll write. What a relief. Total losses worldwide: upwards of $300 billion…plus another $50 billion or so for incidentals; losses from student loans, credit card and auto loan problems.

However, according to Goldman Sachs’ recently released “Bubbles and Overshoots” report, commercial real estate values should plunge 15-20% from current levels.

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 13.2 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, 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 48 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 has turned “down”…but the stats should give you reason to wonder—what kind of Kool-Aid has the landlord community been drinking? [In Q2, 2001 (the Dot-Bomb period), 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 from our other stats that 13.2 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 *Cornish & Carey Commercial 15.0% 2,585,733 19
2 *The CAC Group 11.1% 1,923,110 53
3 *Jones Lang LaSalle 9.7% 1,668,327 27
4 *Cushman & Wakefield of California 8.5% 1,462,891 68
5 *CB Richard Ellis 8.2% 1,423,800 31
6 *Grubb & Ellis 7.6% 1,313,604 60
7 *GVA Kidder Matthews 7.0% 1,207,111 31
8 Tishman Speyer 3.7% 642,323 3
9 *Colliers International 3.4% 590,194 76
10 RREEF America LLC 2.3% 400,000 1
11 Hines 2.3% 390,588 9
12 Shorenstein Company 1.7% 300,489 10
13 Boston Properties 1.5% 257,896 4
14 Fremont Development Funding Corp 1.4% 250,000 1
15 *TRI Commercial / CORFAC Intl 1.3% 230,515 41
16 McCarthy Cook & Co 1.3% 224,958 3
17 *Starboard TCN 1.3% 218,181 86
18 JRT Realty Group, Inc. 0.8% 144,673 1
19 *Studley 0.8% 143,948 10
20 The Presidio Trust 0.8% 129,922 42
21 *The Staubach Company 0.6% 108,071 15
22 Colton Commercial & Partners 0.6% 105,977 13
23 Cushman & Wakefield, Inc. 0.6% 97,936 NA
24 Pacific Union Commercial Brokerage 0.6% 97,674 10
25 *Ritchie Commercial 0.5% 88,488 40
  All Others 7.3% 1,268,061
  Total   17,274,470  

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