Press Release
Positive Growth Returns to Office Markets in San Francisco, San Mateo, Santa Clara Counties;
Rental Rates Fall
August 25, 2003
The devastation of office markets in the San Francisco Bay Area during the past two and a half years is finally showing some signs of life. Mihalovich Partners’ mid-3rd Quarter 2003 report indicates net positive growth to date of 492,000 square feet in San Francisco; 39,000 square feet in San Mateo County; and 289,000 square feet in Santa Clara County. The East Bay region remains in negative growth territory. According to Dan Mihalovich, 21-year leasing veteran and Principal of Mihalovich Partners, “After ten consecutive quarters of repeated onslaughts of new space being dumped on the market by failing tenants and struggling landlords, many tenants have finally risen to the occasion to do the economic thing—respond to rapidly declining rental rates and enormous incentives from the landlord community.” Mihalovich curtails his enthusiasm for a recovery, however, “since the weight of total vacancies remains painfully obvious. Asking rental rates in every Bay county, for both direct and sublease space, are lower than in Q2. Asking rates in San Francisco, even during a period of impressive absorption, are down 6% since Q2. Landlords will find the levels of activity refreshing, but hardly satisfying.” The Mihalovich Partners Q3 findings are illustrated in the table below.
Market Function: Price in Demand:
“Economic forces never sleep”, explained Mihalovich. “Our markets have reacted and are continuing to adjust not only to the dot-com demise, but to 9/11, the stock market crash, the war on terrorism, the $38 billion deficit and junk-bond rating of California, rising unemployment—-massive macro forces which have brought rental rates back to levels of the early 1980s. Market function, in this kind of economy, also dictates shutting down new construction or renovation of office projects. We see these indications in our report on trailing vacancies—the millions of square feet available in the Bay Area within the next 12 months, declining from 55.55 million square feet in Q2 to 54.22 million square feet today. We should see some stabilization, at which point the combination of contributions of new space by landlords and tenants is more readily absorbed, during the next 6-12 months. However, we will need to document consistent net positive absorption overall before we conclude that a “trend” exists. For the moment, it is encouraging to see tenants’ levels of confidence improving to the point that positive growth exists at all.”
Keeping the Lights On: Landlords Must Lure, Then Charge:
Struggling landlords—not a new concept in the San Francisco area. The pressure to perform is as real as ever, and rates of return on leasing are as close to zero (or less) as ever, too. “Institutional money”, Mihalovich continues, “as usual, leaves many of San Francisco’s buildings in strong hands. Eventually, though, everyone responds to long-term returns. Net returns are made more difficult to capture based on soaring operating costs in California. Insurance premiums have skyrocketed. It is not uncommon to see tax and operating expenses in Class A buildings in the range of $16-$22 per square foot per year. Landlords, in today’s market, must lure tenants with compelling concessions, while simultaneously negotiating to shift the risks of rising costs to their tenants. More sophisticated, better credit and better-represented tenants are able to avoid assuming such risks. So, the pressure on the landlord community continues. The voice of the market remains loud and clear: Tenants: If there is any compelling reason for you to become active in this marketplace, speak up and let landlords compete for your business.”
| Current Average Asking Rent, Direct Space (FS) | Current Average Asking Rent, Sublease Space (FS) | Net Absorption Mid Q3 2003 | Vacancy Rate | Millions of Sq Ft Available within 12 Months | |
|---|---|---|---|---|---|
| San Francisco Market size: 106.7 mil s.f. (1,758 bldgs) |
$24.62 down 6% from Q2 |
$17.98 down 5% |
492,000 -809,000 |
16.04% down 6% |
18.12 mil down 4% |
| San Mateo 42 mil s.f. (1,110 bldgs) |
$23.55 no change |
$19.10 down 4% |
39,000 35,000 |
22.76% no change |
9.56 mil no change |
| Santa Clara 78.3 mil s.f. (2,923 bldgs) |
$24.54 down 5% |
$22.66 down 3% |
289,000 -650,000 |
18.30% up 1% |
14.45 mil down 3% |
| East Bay 92.6 mil s.f. (2,768 bldgs) |
$24.86 down 1% |
$20.35 down 2% |
-42,000 -97,000 |
12.93% up 1% |
12.09 mil no change |
| Total Sq Ft Available | 54.22 mil down 1% | ||||
