Market InsightEditorial & Advice to Tenants: 1Q2008

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.

Ten Dollar Gas and the Return of the Horse & Buggy

There’s simply nothing to be bullish about, at this point. In fact, at the negotiating table tenants would best be served by holding your guns and repeating the mantra that only a sensible set of economic terms will work for you—“fair market rent” be damned. This is not a time to chase the market or try to appease a building owner by agreeing to the most recently completed foolish transaction signed by an ill-informed tenant. Cash is king and tenants must only make long term commitments that assure stability and a solid handle on risk. Managing risk, a paramount task we take on in addition to all of our other responsibilities when we represent tenants in leasing negotiations. The mine field, at present, lies all around the financial district. Let the buyer beware of all those ready to sign you on to deals of yesteryear. The markets are collapsing and you must act accordingly.

State Budget Deficit Crisis

Within several months the State’s budget deficit (reporting) soared from $8 BILLION to $14 BILLION to $20 BILLION. The Gov’s first move? Cut $5 billion from education. Don’t look for help from the real estate sector, with housing pricing continuing to decline and commercial real estate values waning as well. This is a dangerous game in any economy, but deadly serious in the face of the current recession. The old-line tactics will likely band-aid the problem, refinancing current debts on the backs of Californians to pay in the future. Typical approaches? Issue state bonds; incur short-term indebtedness; “off-budget” borrowing and spending; and/or creating optimistic revenue forecasts.

Anyone still remember the $15 BILLION bond-bail-out (Prop 57) of the State in 2004? Proponents hailed that $8 billion would be kept in reserves to prevent future deficits. Well, here we are just four years later. Time to leverage the state, and our future, once again.

Job Crisis

Although we’ve given little credibility to the US Gov’s accounting methodologies, generally speaking, their Dept. of Labor reported in March that unemployment rose to 9.2 MILLION WORKERS. That’s the 7.8 million they DO count (“Unemployed Persons”) plus the 1.4 million who don’t exist on the Gov’s roll (“Persons Not in the Labor Force”).

War On Terror Crisis

The cost of the War, human and economic, is a tragedy. Try as we must, on this business website, to refrain from political comment—we must continue to highlight the enormity of the cost of The War on Terror, the war in Iraq and Afghanistan:
Over 4,000 dead American soldiers.
Over 30,000 wounded American soldiers.
Over $525 BILLION funding approved to date.
Over $135 BILLION pending approval for additional funding.

Consumer Confidence Crisis

“The last six months have been the most turbulent period for the global economy in several decades. When the USA sneezed at the outset of the sub prime disaster nearly a year ago, the rest of the world quickly caught a cold. No region or country has been spared the domino effect of the US sub-prime and credit crisis”, observed David Parma, global head of Customized Research, The Nielsen Company.

“Consumers around the world are struggling with the same global issues that are impacting their daily lives. It’s an unfortunate pendulum. On the one hand we are seeing soaring global oil prices, rising commodity prices which are impacting grocery prices, rising interest rates and increasing inflation. This is happening in tandem with falling property prices, weakening labour markets, decreasing industrial output levels and growing unemployment rates which have all resulted in less spending power for the average person. Overall, it’s not a good picture,” commented Parma.

Wall Street / Main Street Crisis

To our old client, so long, Bear…

During the past year, the financial industry has suffered more than $300 BILLION of write-downs and credit losses. And, unfortunately, the end cannot be seen from here.

In his Investment Outlook from April, Bill Gross, Managing Director of PIMCO shared a collection of pearls:

“Home price declines of 20% are in fact much more of a shock to the American economy than the popping of the Internet bubble and NASDAQ 5000, because the amount of homeowner leverage is so much greater. A 20% negative adjustment not only wipes out all ownership equity for millions of Americans, it turns their homes ‘upside down’—incentivizing them to let their gardens grow weeds instead of lettuce. The decline needs to be stopped quickly in order to avert additional crises…

There seems no way that current reserve requirements for banks will not in some nearly uniform way be imposed on investment banks. Leverage and gearing ratios of securities firms therefore, will in a few years resemble those of commercial banks themselves resulting in reduced profitability for major houses such as Goldman, Lehman, and Merrill Lynch. Currently investment banks have only 50% of the capital base of standard commercial banks. If the two are to approximate each other either through regulation or moral suasion, these Shadow banks will likely be forced to raise expensive capital and/or reduce the bottom line footings of their balance sheets. Either way, this need to have the Shadow Banking System more closely resemble the banks of Jimmy Stewart’s ‘It’s a Wonderful Life’ will be costly, and bond spreads as well as stock prices should begin to reflect it…

I’ve suggested: 1) home price declines have to be halted in order to revive the U.S. economy, 2) the Bear Stearns crisis and its solution will lead to increased government regulation and a higher probability of inflation, 3) J.P. Morgan (the old man) was right—character, not assets, should form the foundation for lending, although a reversion to this old-fashioned model is not likely anytime soon, and 4) whether you know it or not—whether you like it or not—you are bailing out Wall Street.”

Foreclosure Crisis

6,600 San Francisco Bay Area homeowners were foreclosed during the first quarter, up 300% from last year. Many a veteran of the commercial real estate markets have shrugged off this phenom, yet the shoe will likely drop in the office market before long. The ugly combo of tight credit, sagging office rents and waning demand will wreak havoc on highrise investors—especially those who bought during the past several years at cap rates and pricing that never made sense in the first place. Egregious speculators in the commercial world will have their hats handed to them, as those have in the residential sector.

San Francisco Market Overview

More Space Available Now than During the Dot-Bomb!

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 51 million square feet on the market. Tenants in San Francisco have a LARGER number of parcels to choose from in today’s market than in Q2 of 2001—the period just before our markets crashed. Today the trend for absorption has turned “down”…and the stats should give you reason to wonder—what kind of Kool-Aid has the landlord community been 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.]

Every quarter we track this data for you. This is the proverbial “forest” of options for you, tenants. So study up and make certain that you select a broker to represent you who understands the significance of the magnitude of options—and how to maximize leverage for you in lease negotiations.

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 (dan@TheSpacePlace.net)
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. 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 51 million square feet on the market. Tenants in San Francisco have a LARGER number of parcels to choose from in today’s market than in Q2 of 2001—the period just before our markets crashed. Today the trend for absorption has turned “down”…and the stats should give you reason to wonder—what kind of Kool-Aid has the landlord community been 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 dan@TheSpacePlace.net.

Take Me Straight to the Numbers: San Francisco Bay Area Rental Rates. Supply/Demand.

Please note: We provide Bay Area market data and analyses for the current year only. To request commercial real estate market data for previous quarters, please contact us.

Who Has the Most Space in San Francisco? Surprise…

When we approach a prospective new tenant client, we tell them that we NEVER represent landlords, always avoiding this conflict of interest. So, which of our competitors—leasing firms—do the most landlord representation, and who controls the most space in San Francisco? And, most importantly, why would you feel comfortable having them represent YOU?

Below we’ve surveyed the entire 103 million square foot inventory of San Francisco, and illustrated the companies with the most control of space on the market, the Top 25. You know from our other stats that 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 (#7); RREEF (#10); Hines (#11); Shorenstein (#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 11.9% 1,923,207 54
2 *Jones Lang LaSalle 11.7% 1,891,832 27
3 *Cushman & Wakefield of California 9.5% 1,530,726 65
4 *CB Richard Ellis 9.2% 1,477,611 32
5 *Grubb & Ellis 8.1% 1,296,856 56
6 *GVA Kidder Matthews 7.6% 1,218,771 31
7 Tishman Speyer 4.0% 642,323 3
8 *Colliers International 3.8% 607,454 78
9 *Cornish & Carey Commercial 3.0% 483,831 18
10 RREEF America LLC 2.5% 400,000 11
11 Hines 2.4% 381,398 9
12 Shorenstein Company 2.3% 374,298 10
13 Fremont Development Funding Corp 1.6% 250,000 1
14 Boston Properties 1.5% 248,948 4
15 *TRI Commercial / CORFAC Intl 1.5% 234,333 35
16 McCarthy Cook & Co 1.4% 232,084 3
17 *Starboard TCN 1.4% 222,917 79
18 Retail West 1.2% 201,000 2
19 *Studley 1.2% 187,824 10
20 *NAI BT Commercial 1.0% 159,279 26
21 JRT Realty Group, Inc. 0.9% 143,919 1
22 *Ritchie Commercial 0.9% 140,178 37
23 The Presidio Trust 0.9% 139,507 42
24 *Newmark Knight Frank 0.8% 131,522 4
25 *Colton Commercial & Partners 0.8% 120,818 9
  All Others 9.1% 1,467,668 565
  Total   16,108,304  

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