Market Insight Editorial & Advice to Tenants: 1Q2012
In this Issue:
- What Bullish Fundamentals on Commercial Real Estate?
- 53 Million Square Feet STILL On the Market
- Negative Absorption Surfaced Again in Q1
- Not to Be Ignored: 5 Million Square Feet Came on the Market
- Top Five Leasing Transactions by County for 1Q 2012
- Vacancy Rates: Are Your Options Fading?
- Who Has The Most Incentive To Drive Up Rental Rates In San Francisco?
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 where we track the changes for all size ranges of tenants in these reports every 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. For more historical perspective, feel free to peruse the last 10 years of pearls of wisdom.
Dan Mihalovich
President, Mihalovich Partners
Founder, The Space Place®
What Bullish Fundamentals on Commercial Real Estate?
It’s déjà vu all over again, folks. And worse, in my view. Since we last checked our crystal ball, economic fundamentals aren’t improving. But that still doesn’t prevent lenders and landlords from getting together (albeit with more cash down) to begin building new buildings on the hope and prayer that tech-tenant demand will continue endlessly. The CRE industry knows from experience—we’re lousy at predicting tenant demand.
Not to worry, I suppose, since those with Other People’s Money are finding new ways to spin the spreadsheets. And venture capital is just another version of OPM.
Didn’t the billion paid for Instagram prove anything to you? Haven’t valuations gone crazy? Building sales-prices in San Francisco have gone meteoric. High-rises are being flipped left and right. Speculation has so severely impacted our landscape.
In the meantime, Too Big To Fail is no more stable than it was after The Crash. Has Washington become more impactful as a result? Are the credit default swap and CDO markets any more transparent than before the crash? Hardly.
More recently Europe has slid even further into recession. Member banks want the European Central Bank to kick in $1 TRILLION of support. And their contagion will deeply affect our economy for the foreseeable future. While the press is now focused on Spain, the fact is that we cannot count on any activity in Europe to breathe life into any US recovery.
Metrics from China during Q1 are causing more alarm. Employment prospects in the US remain suspect, with official unemployment at 8.7% (far higher when one considers the millions of Americans no longer being counted as actively searching). California’s rate remains much higher…and the local Bay Area rate of 8.7% offers little comfort. Yes, local hiring has improved, but only recently.
Can the Bay Area truly “recover” as a state independent of the negative prospects all around us? This is a speculative “bet” based on very shaky fundamentals, indeed.
With this landscape in mind (and as we’ve previously analyzed, ad nauseum), tenants staring in the face of office leasing negotiations should proceed conservatively and with great caution. Locking in long-term leases that cost one’s business more than 8-10% of anticipated gross revenue should be heavily scrutinized…and best be avoided.
Our instructive articles, “How to Survive the Big Ugly” and “Arbitrage: Finding a Motivated Landlord” will be helpful to you for planning your strategy…and selecting (us) a broker to represent your interests.
Let the buyer (tenant) beware.
53 Million Square Feet STILL On the Market
53 million square feet of office space STILL 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, when only 42 million square feet were available for lease.
Q1, 2012 in the San Francisco Bay Area wrapped up as follows:
| square feet available (millions) | average time on market (months) | |
|---|---|---|
| San Francisco | 14.7 | 26 |
| San Mateo County | 6.9 | 22.5 |
| Santa Clara County | 14.5 | 27.9 |
| Contra Costa & Alameda Counties |
16.9 | 26.1 |
Negative Absorption Surfaced Again in Q1
Could this be a sign of weakness in this overbought marketplace? We think so.
All Bay Area counties showed total absorption of space (adding together direct and sublease absorption), but negative absorption reared its head in the following places:
- San Francisco: 100,000 square feet negative net absorption of sublease space.
- San Mateo County: 120,000 square feet negative net absorption of direct space.
- Contra Costa/Alameda County: 13,000 square feet of negative net absorption of sublease space (for the third quarter in a row).
Not to Be Ignored: 5 Million Square Feet Came on the Market
While the press and landlord communities are pumping up the market with stories of jacked tech tenants expanding endlessly, little attention has been given to the amount of space coming on the market.
Note from above that the sublease market has shown signs of weakness with negative absorption. And we can’t underscore the notion that landlords and landlord brokers have pushed rental rates far too hard, and far too quickly.
Tech is far from the lion’s share of the tenant community; and many of those companies have likely overextended themselves in space grabs.
One quarter’s negative absorption doesn’t make a “trend”….but here’s the amount of new space that came on the market during the last 45 days of 1Q 2012:
| square feet available | |
|---|---|
| San Francisco | 1,080,000 |
| San Mateo County | 780,000 |
| Santa Clara County | 1,030,000 |
| Contra Costa & Alameda Counties |
2,480,000 |
Top Five Leasing Transactions by County for 1Q 2012
San Francisco
| 1 | SalesForce.com (50 Fremont St) |
401,786 sq. ft. |
| 2 | Bank of America / Merrill Lynch (101 California St) |
121,986 sq. ft. |
| 3 | TPG Capital (345 California St — The California Center) |
119,000 sq. ft. |
| 4 | RPX Corporation (1 Market St — Steuart Street Tower — One Market Plaza) |
116,520 sq. ft. |
| 5 | Kabam, Inc. (795 Folsom St) |
64,000 sq. ft. |
San Mateo County
| 1 | Heartflow, Inc. (1400 Seaport Blvd Bldg 9 — Pacific Shores Center) |
103,000 sq. ft. |
| 2 | Evernote (305 Walnut St, Redwood City) |
87,770 sq. ft. |
| 3 | Qualys, Inc. (1600 Bridge Pky Bldg 9 — Bayshore Technology Park) |
48,701 sq. ft. |
| 4 | Stella & Dot (1111 Bayhill Dr Bayhill IV — Bayhill Office Center) |
26,911 sq. ft. |
| 5 | SERENA Software, Inc. (1850 Gateway Dr, San Mateo Plaza) |
20,790 sq. ft. |
Santa Clara County
| 1 | Apple, Inc. (250 S Mathilda Ave, Sunnyvale Town Center) |
156,960 sq. ft. |
| 2 | Motorola Mobility (1000 Enterprise Way Bldg A-Moffett Towers, Sunnyvale) |
80,668 sq. ft. |
| 3 | Heald College (341 Great Mall Pky, Milpitas) |
54,750 sq. ft. |
| 4 | Jazz Pharmaceuticals, Inc. (3180 Porter Dr, Palo Alto) |
43,848 sq. ft. |
| 5 | GSA (1450 Coleman Ave, Santa Clarak) |
36,600 sq. ft. |
Contra Costa &
Alameda Counties
| 1 | Accelrys, Inc. (2440 Camino Ramon, Bldg N-Bishop Ranch 6) |
64,409 sq. ft. |
| 2 | Wendel, Rosen, Black & Dean LLP (1111 Broadway — Oakland City Center) |
52,000 sq. ft. |
| 3 | Zebra Technologies Corporation (55 Harrison St Jack London Market — Jack London Square) |
35,774 sq. ft. |
| 4 | Bionovo, Inc. (5858 Horton St EmeryStation I — Emerystation Plaza) |
32,000 sq. ft. |
| 5 | TBD (1111 Broadway — Oakland City Center) |
23,232 sq. ft. |
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 | |||||
|---|---|---|---|---|---|---|---|---|---|---|
| Q1’12 | Q4’11 | Q1’12 | Q4’11 | Q1’12 | Q4’11 | Q1’12 | Q4’11 | Q1’12 | Q4’11 | |
| 5,000-9,999 | 307 | 309 | 125 | 118 | 274 | 266 | 420 | 434 | 1126 | 1127 |
| 0 | ▲ 6% | ▲ 3% | ▼ 3% | 0 | ||||||
| 10,000-19,999 | 199 | 198 | 72 | 68 | 141 | 139 | 165 | 169 | 577 | 574 |
| 0 | ▲ 6% | ▲ 1% | ▼ 3% | 0% | ||||||
| 20,000-29,999 | 63 | 62 | 26 | 20 | 45 | 43 | 74 | 73 | 208 | 198 |
| ▼ 1% | ▲ 30% | ▲ 4% | ▲ 1% | ▲ 5% | ||||||
| 30,000-39,999 | 23 | 28 | 16 | 18 | 17 | 12 | 21 | 21 | 77 | 79 |
| ▼ 17% | ▼ 11% | ▲ 41% | 0 | ▼ 2% | ||||||
| 40,000-49,999 | 17 | 15 | 4 | 5 | 17 | 19 | 16 | 16 | 54 | 55 |
| ▲ 13% | ▼ 20% | ▼ 10% | 0 | ▼ 2% | ||||||
| 50,000-59,999 | 12 | 12 | 8 | 6 | 9 | 10 | 8 | 10 | 37 | 38 |
| 0 | ▲ 33% | ▼ 10% | ▼ 20% | ▼ 2% | ||||||
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.
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 | 10.9% | 2,107,484 | 74 |
| 2 | *Cushman & Wakefield of California | 9.4% | 1,818,398 | 63 |
| 3 | *Jones Lang LaSalle | 8.7% | 1,675,839 | 45 |
| 4 | *Cornish & Carey Commercial Newmark Knight Frank | 7.5% | 1,444,966 | 34 |
| 5 | *Colliers International | 6.9% | 1,340,225 | 85 |
| 6 | *Kidder Mathews | 6.6% | 1,279,640 | 47 |
| 7 | *Grubb & Ellis | 4.9% | 941,022 | 51 |
| 8 | *CBRE | 4.3% | 838,691 | 24 |
| 9 | Tishman Speyer | 4.3% | 832,893 | 5 |
| 10 | Shorenstein Properties, LLC | 4.1% | 784,307 | 7 |
| 11 | *Avison Young | 2.7% | 517,930 | 5 |
| 12 | Hines | 1.6% | 309,017 | 6 |
| 13 | Beacon Capital Partners, LLC | 1.6% | 307,000 | 1 |
| 14 | Wilson Meany Sullivan | 1.5% | 294,100 | 4 |
| 15 | *Cassidy Turley | 1.1% | 214,563 | 22 |
| 16 | *TRI Commercial / CORFAC International | 0.9% | 176,001 | 54 |
| 17 | Boston Properties Limited Partnership | 0.9% | 172,317 | 4 |
| 18 | The Presidio Trust | 0.9% | 168,659 | 45 |
| 19 | Laurus Corporation | 0.7% | 142,901 | |
| 20 | *Starboard TCN Worldwide Real Estate | 0.5% | 100,168 | 47 |
| 21 | *Terranomics Retail Services | 0.5% | 98,933 | |
| 22 | *Colton Commercial & Partners | 0.4% | 85,680 | 23 |
| 23 | *McLellan Commercial Real Estate, Inc. | 0.4% | 73,060 | 4 |
| 24 | Pacific Eagle Holdings Corporation | 0.4% | 68,778 | |
| 25 | *Sansome Street Advisors | 0.3% | 64,010 | 9 |
| Total | 19,291,261 | |||
