Market Insight Editorial & Advice to Tenants: 3Q2011

54 Million Square Feet On The Market

Q3, 2011 in the San Francisco Bay Area wrapped up as follows:

square feet available (millions) average time on market (months)
San Francisco 15.6 27.3
San Mateo County 6.8 23.2
Santa Clara County 14.3 27.5
Contra Costa &
Alameda Counties
17.0 25.1

The hype in the marketplace is not unfounded. Roughly five million square feet of the Bay Area’s inventory of space has been leased since Q1. All fingers point to the impressive growth of tech and social media companies, although the absorption may be attributed to a modest number of drivers: Google, Apple, Microsoft, Salesforce, Twitter (I still don’t understand the business model!), Zynga (whose building promptly went up for sale after their lease was signed), etc.

Selected submarkets in San Francisco (SOMA, obviously, but now creeping NOMA) have become a magnet for startups on steroids, whose net profits remain to be seen; and whose goals to triple (or more) employee counts will be intriguing to watch. The cash-burn of these companies must conjure up Dot Com memory.

The back-drop of all of this leasing activity is

  • a spotty Bay Area economy;
  • California’s carrying the 3rd highest unemployment rate in the country; and
  • an ongoing earthquake roiling daily in the financial markets around the world.

54 million square feet of office space remains on the market (notably on the market for 2 years or longer!). Our markets crashed under the weight of less supply during the Dot Bomb ten years ago, when only 42 million square feet were available for lease.

Tenants: how many alternative spaces are available to YOU to suit your requirement? Isn’t this part of the core litmus test of how soft or tight the market really is? See our chart, below. We track the changes for all size ranges of tenants in these reports…from quarter to quarter. If you want real-time data, please call me.

If you’re in search of intelligent life in the brokerage community, please enjoy this Editorial with my compliments. And, here are the last 10 years of pearls of wisdom.

Dan Mihalovich
President, Mihalovich Partners
Founder, The Space Place®

Moving Up! We’ve Relocated our Headquarters

655 Montgomery

After eight terrific years at 655 Montgomery Street, we’ve relocated…upstairs! Our new office is Suite 1490, so kindly adjust your GPS. Our new space and views are beautiful, replete with the latest technology across the board. We expect visitors, of course, so please let us know when you’re going to be in the neighborhood. We’re also expecting Skype and Face Time sessions, available at our conference center.

Our client leasing meetings typically address highly confidential issues, so we’re pleased to offer our off-site premises to host these sessions, away from the “distractions” of your offices.

All of our other contact information remains unchanged. Onward!

Thank You, Clients!

This year has been terrific for our clients and we’re especially pleased at the outcome of each and every negotiation and planning process.

Consumer Credit Counseling Service of San Francisco Consumer Credit Counseling Service of San Francisco
Expansion of their San Francisco office at 595 Market Street.

Egoscue Egoscue Method
Relocation of their San Francisco office to 291 Geary Street.

Kerr & Wagstaffe, LLP Kerr & Wagstaffe, LLP
Renewal of their lease at 100 Spear Street, San Francisco.

Mannion & Lowe, PC Mannion & Lowe, PC
Renewal of their lease at 655 Montgomery Street, San Francisco.

O’Connor & Associates O’Connor & Associates
Relocation of their San Francisco office to 201 Mission Street.

Rockman et al Rockman et al
Relocation of their San Francisco headquarters to 595 Market Street.

Rouda Feder Tietjen & McGuinn Rouda Feder Tietjen & McGuinn
Renewal of their lease at 44 Montgomery Street, San Francisco.

Santen Inc. Santen Inc.
Relocation of their U.S. Headquarters to 2100 Powell Street, Emeryville.

Thanks to all of you for your confidence and trust.

Pro Tennis Tour Comes to Tiburon. Mihalovich Partners Sponsors.

For tennis fans, it doesn’t get better than this. World-class Ivo Karlovic (winner), Sam Querrey (finalist) and many other touring pros returned to Tiburon to play for $100,000 prize money. You don’t get this kind of intimacy at the U.S. Open, where visitors can mingle with the players, work out at the gym together and see these guys up close and personal.

It was a fantastic display of competition and conditioning. Umpires, ball-people and a number of spectators had to duck for their lives to avoid the oncoming 140 mph serves!

We were pleased to be a sponsor of the event, with benefits going to the local Reed Schools Foundation.

Mark your calendars for next year. These athletes should not be missed!

“Double-Dip Recession”: You Live in Your Nomenclature. I’ll Live in Mine.

Why can’t the economy in the rest of the country act like San Francisco/Silicon Valley? Demand for office space has boomed. New residential construction is abundant. Restaurants and highways are full. There’s no recession, here…or is there?

The pundits are rife with metrics to document and differentiate between “Recession”, “Great Recession”, “Depression” and “Deflation”…but the bottom line is whether and when a true “Recovery” will take place. There’s no doubt that the majority of service firms (excluding the wealthiest of law firms and VCs) in this area cannot sustainably afford current market rates for Class A and B space. The run-up has been too fast and severe.

But the Bay Area is the place where invention and innovation is born. It’s also where venture capital lies in waiting, quick to fund the next Google, Facebook or Zynga. Perhaps the best way to think of this region is as an incubator. When the going gets really good, the river of high-leverage/speculative money flows until it doesn’t. Landlords and their brokers (see the list of usual suspects: JLL, C&W, CBRE, CAC, etc.) assert that tenants “don’t blink” when they disclose their asking rates for space. Venture and investor-backed companies on a tear are simply rolling over and paying anything-goes rates, alongside huge security deposits. They’re under too much pressure to hire, perform and open their expanded offices.

The number of locals doubling and quadrupling is impressive. But where is this all headed with the backdrop of financial apocalypse outside these local borders? Giving away your new product/service for free for too long isn’t a recipe for success, so will advertising and partner-deals pay for these humungous burn-rates? Incubating companies whose mantra is to quickly launch from 100 to 3-400 people isn’t just speculative; it’s beyond reason in any other playing field.

Is this the “Recovery” you were looking for? Even the landlord community knows this won’t last. Better, tenants, to hire aggressive and assertive brokers who’ll talk some sense at the negotiating table…and not just roll over and cash a commission check.

Evidently You Didn’t WANT a Job

Peering into the bubble that has become the San Francisco-to-Silicon Valley office market, one must wonder how and why we have any unemployment in this area. After all, rental rates have shot up on the negotiating wisdom of game-companies, app blasters, cloud pleasers, social media climbers, tweeters and other technos…all with (allegedly) far smarter (venture) money than during the Dot-Bomb.

In spite of that fuel, California’s 12% unemployment rate dwarfs the national 9% rate. All things in perspective, you’ll have to look back to the recession of ‘82/‘83…or ‘40/‘41 to find conditions this abysmal.

The Bureau of Labor Statistics (BLS) calls it a 240 million-person U.S. population and assumes a 64.7% “participation rate”, our lowest participation since 1984. BLS calculates that 86 million Americans are “Not in the labor force” — 16 million higher than in the year 2000. But these folks are NOT the “unemployed”! These are Americans who’ve (according to BLS) stopped looking for a job, or have simply been out of the market for too many months and given up hope.

BLS also reports on those unemployed for 27 weeks or longer — there are 6 million since November, 2009. Unemployment and “Not in the labor force” figures are likely grossly under-reported.

And one more statistic for your acid-reflux condition: those now employed in “Non-agricultural industries” double the number of 1965. And, yes, we now have half the number of folks working in agriculture than in 1965. Cheers to a service economy.

Bet You $12 Billion That You’ve Been Lied To

Swallow this factoid: Since 2005, Wall Street firms have been fined $12 billion by the SEC for a variety of sordid acts ($4 billion still hasn’t been paid, by the way). It sounds like real money, but in perspective represents just a slap to an industry whose collective market value dwarfs such fines.

In spite of their criminal behavior, Main Street keeps buying whatever Wall Street has to sell. And this continuum persists throughout our economy, including in the commercial real estate field, where conflicts of interest pervade in companies that represent both landlords and tenants and earn compensation—like the rating agencies—to prop up building values and rental rates on the one hand all while representing tenants (who desire and are entitled, with proper representation, to lower rates) to lease space in the same buildings.

When, tenants, will you smell the conflicts of interest and act accordingly? Are you being told the truth during your broker interviews?

It’s shocking that our Presidential candidates are subjected to media-vetting of their respective public statements. Why? Because we know that the candidates are misleading or lying to the public and the media proves it on national television. How appalling, that prospective heads of State, the rating agencies, public CEOs and our closest financial advisors lie to our face.

In commercial real estate brokerage, in spite of obvious conflicts of interest, one sells the services its company has to offer. To be all things to all people? How enticing. But the greater the commission involved, the higher the propensity to bend the truth about conflicts; about experience and capabilities; and all the more likely they’ll tell you just what you want to hear.

How about a gut check? When was the last time you heard a Wall Street firm issue a bearish report on the economy? Look hard. You won’t find it. Everyone sells their position. We have to be clever and resourceful enough to see that much of the time we’re being served a cow patty and being told that it’s a pie.

Landlords Are High on Arbitrage

On the stump for his new book That Used to Be Us, Thomas Friedman recently addressed a capacity crowd at the Marin Speaker Series. The biggest show at present, according to Friedman, is the merger of globalization and information technology.

Everything, including arbitrage, moves at viral speed. Convenient, too, for our attention-deficit culture.

Thousands of startup business ideas, if not companies, are spawned in college dorms. Friedman espoused a Middle Eastern startup, already grossing millions, formed by youngsters with less cash “than all of you in the front row have in your pockets right now.”

The instantaneous globalization of resources—accessible by and to everyone—creates exponentially greater opportunities than ever perceived.

Kudos to Friedman for positing a flowery future out of all the pandemonium flying in cyber space. But he had hardly a ray of light to shine on our politically and financially crippled economy.

David Brooks, the subsequent speaker, quoted a source suggesting that the plight of the U.S. economy will land somewhere between the default of Greece and the fall of the Roman Empire.

Friedman suggests there is hope for the U.S. to regain its place as the global economic dominatrix. But will this take place before or after the next Great Depression?

And what does this have to do with the price of commercial real estate? Everything.

The financial collapse was global, although many suggest that there’s little evidence of it remaining in the San Francisco area, where all landlords (and their brokers) are high on kool-aid…again.

And where does “investment” money flow? Wherever the spreads are beaming brightest.

Commercial real estate used to be a conservative depository, where “long term” investing meant banking on the longevity of great credit tenants in a stable environment. Today, “investing” is cooked with OPM (other people’s money); “long term” is as short as it takes to turn a trick; and all in and out, slam bam … who wants to be left exposed in such unstable times?

Arbitrage is at the center of this speculation. Think of the “flipping” of the BofA Building in recent trades, or the rest of at least 50% of the San Francisco inventory which traded during the past 3-4 years. Just don’t be the one holding the trash when the fall comes. Or just be wrong for the right reasons. Either your investors will forgive you or you’ll simply replace them with new speculators. Make my spread; get me out; and get me into the next best deal. Landlords are high on arbitrage. Oh, and just after the mammoth Zynga lease closed at 650 Townsend? You guessed it; the building is for sale.

Who is your building owner in the San Francisco area? They’re probably just passing through. The landscape just isn’t what (or rather, whom) it used to be, since arbitrage “works” and settles in like flood waters…until the spreads narrow and the money moves on.

To everything, a place in an incubator. After all, isn’t San Francisco just an incubator? Guaranteed, many of these companies are just passing through, like building owners.

If innovation is global and accessible to everyone, then why are tech and social media tenants bulking up on office space at outrageous rents in the San Francisco area? Won’t these tenants need LESS space since corporate collaboration will take place largely in cyber space?

Perhaps we should recognize that the conventions of commercial leasing (where typical leases for large tenants are usually 5-10 years) doesn’t match up with venture/angel funding (much shorter horizons). It’s no wonder that incubator spaces are full. It’s a just-in-time place to grow a company, never mind the cash burn. Our service economy loves it: Law firms to provide IP, business and litigation support; PR, web and marketing firms to ramp the growth; M&A firms at the ready to blend and promote; and all just as prepared for the fall.

At the speed of arbitrage, if profits don’t materialize, the drain is just a click away. And it can happen just that fast. Expert panels everywhere shed the same message: “This time it’s different. This isn’t the Dot Com. Money and Management is smarter.”

Not really.

The money is cheap, but commitments are short. And the backdrop of all “investing” today is global recession. Deep recession, with risk compounded by the same fundamental flaws that brought about the ‘07/‘08 financial debacle. Has Wall Street fundamentally changed during the last three years? Is the credit default swap market more transparent than before? Are the banks and other public companies marking assets to “market”? Of course not.

How about the rating agencies? Not much change, there, in spite of overwhelming evidence of cooking the ratings for the very people who paid the agencies their fees. Bonds simply don’t become bonds, period, without the AAA-rating from the rating agencies.

With the speed of arbitrage, we’ve “infected” the economies of our trading partners. We levered speculation throughout Europe (and beyond) because the spreads paid speculators to do so. We wait on the edge, every day, to see how the debt-winds blow in the EU; our stock market convulses accordingly. In the meantime, any one of our too-big-to-fail giants could wake up dead—just like Lehman or Bear—from over-exposure to bad loans or insurance (credit default swaps) gone bad. There won’t be any notice. It will happen just like MF Global. Toast.

Building owners/buyers appear to be on mood-altering drugs, as though the tech surge is permanent; well-earned and established; and worthy of securitization in spite of everything burning around us.

Where is the consideration of China’s faltering economy? What about the soaring cost of oil, always a spoiler and root cause of recession? And what about the basic notion of affordability? Tenants’ budgets do not support the new landlords’ underwriting.

These disconnects are troubling and largely ignored in the marketplace. Tenants, beware. And be prepared for tough times ahead…more consolidation…and more than likely, lower rental rates.

Vacancy Rates: Are Your Options Fading?

Tenants should watch carefully to detect how and to what extent your field of options changes. 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 leasing activity? Review the chart, below, and let’s discuss.

Blocks of Space Available (sq.ft.) San Francisco County San Mateo County Santa Clara County East Bay Counties Total Change in # of Blocks Available
Q3’11 Q2’11 Q3’11 Q2’11 Q3’11 Q2’11 Q3’11 Q2’11 Q3’11 Q2’11
5,000-9,999 291 283 125 152 273 292 442 451 1,131 1,178
▲ 3% ▼ 18% ▼ 7% ▼ 2% ▼ 4%
10,000-19,999 199 203 67 83 135 151 167 188 568 625
▼ 2% ▼ 19% ▼ 11% ▼ 11% ▼ 9%
20,000-29,999 59 48 25 21 45 56 65 67 194 192
▲ 23% ▲ 19% ▼ 20% ▼ 3% ▲ 1%
30,000-39,999 27 32 15 18 10 13 18 21 70 84
▼ 16% ▼ 17% ▼ 23% ▼ 14% ▼ 17%
40,000-49,999 16 18 6 10 20 23 16 19 58 70
▼ 11% ▼ 40% ▼ 13% ▼ 16% ▼ 17%
50,000-59,999 16 13 8 5 10 13 8 6 42 37
▲ 23% ▲ 60% ▼ 23% ▲ 33% ▲ 14%

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.

Review the latest Market Trends in detail.

Who Has the Most Incentive to Drive Up Rental Rates In San Francisco?

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? Who’s marketing the most space in San Francisco?

Below we’ve surveyed the entire 113 million square foot inventory of San Francisco, and illustrated the Top 25 companies listing the most space on the market. Of the top 8 companies, all are office leasing brokerage firms, controlling 65% of the City’s vacancy!

These brokerage firms are beholden to more than 400 local landlords, paid to drive up rental rates and drive down concessions for tenants.

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, Shorenstein, RREEF, Boston Properties and Hines. Surprised, are you not?

% Market Share Square Feet # of Landlords/ Buildings

The % in the chart below 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 landlords/developers.

1 *The CAC Group 12.5% 2,576,233 72
2 *Jones Lang LaSalle 12.0% 2,459,810 37
3 *Cornish & Carey Commercial Newmark Knight Frank 9.5% 1,943,098 41
4 *Cushman & Wakefield of California 8.9% 1,834,780 58
5 *Colliers International 6.4% 1,305,135 81
6 *Kidder Mathews 6.3% 1,289,309 42
7 *CBRE 4.8% 981,989 25
8 *Grubb & Ellis 4.6% 938,415 53
9 Shorenstein Company, LLC 4.0% 830,917 8
10 Tishman Speyer 2.4% 500,823 4
11 Beacon Capital Partners, LLC 1.5% 307,000 1
12 Hines 1.4% 288,214 6
13 Stockbridge Capital Group, LLC 1.4% 281,982 1
14 Boston Properties Limited Partnership 1.4% 278,877 4
15 The Presidio Trust 0.8% 174,375 40
16 McCarthy Cook & Co. 0.8% 165,621 2
17 *TRI Commercial / CORFAC International 0.8% 161,129 46
18 *Starboard TCN Worldwide Real Estate 0.7% 149,457 48
19 *Terranomics Retail Services 0.5% 105,832
20 *Colton Commercial & Partners 0.4% 89,483 20
21 *McLellan Commercial Real Estate, Inc 0.4% 86,321 4
22 *Sansome Street Advisors 0.4% 82,211 9
23 Academy of Art University 0.4% 78,116
24 *UGL Services 0.3% 68,987
25 *Cassidy Turley BT Commercial 0.3% 68,549 20
  Total   20,531,104  

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