Market Insight Editorial & Advice to Tenants: 4Q1997
The real estate economy appears to be steamrolling along. Office markets throughout the country are continuing to tighten. San Francisco, historically a city with limited patience for the business community, is now one of the top priced areas in the nation, second only to Midtown, NY. During the escalation period of the past several months the market has worked hard to price out demand; shift demand to outlying suburban markets; price in building renovations and new construction; and give rise to many of us in the San Francisco Bay Area to answer: What’s next and how can the tenant community afford to sustain or grow business at these rental levels? The San Francisco year-end 1997 report is complete and available here; also viewable are the Silicon Valley Office and Industrial reports.
The rapid rise in rental rates, in particular for Class A space in San Francisco, has taken many by surprise. Human nature being what it is, each successive deal is anticipated to exceed the returns of the previous transaction. Interestingly, an examination of all 1997 office deals indicates that relatively little volume of square footage traded at the coveted $40 per square foot range. Out of all the 1997 deals (all classes of space, citywide), only 41% were at rental rates above $30/sf; only 21% were at rates above $33/sf; 13% were at rates above $36/sf; and 8% were at rates above $40/sf. While one should anticipate greater volume at the $40 level this year, it is reasonable to expect the market to continue to push tenants to a new level of inspiration and creativity. To the extent there is elastic demand in the Bay Area tenant community, we should see some innovative moves to less expensive markets, perhaps out of state; greater planning efforts to democratize and consolidate space; and continuing moves toward hoteling and telecommuting.
Out of the heated business environment we see extreme competition for labor. “Where shall I go to work today?” is the mantra of the multi-media and technology worlds. Some of the country’s brightest labor analysts suggest that wage freezes are around the corner for less essential members of the corporation, as corporations try to accommodate their upper caste. Layoffs seem to get little empathy from the shareholder community, while the press emphasizes bigger corporate profits and greater competitiveness rather than the plight of displaced workers. All things considered, and now focusing on enormous upward pressure on rents, employers may look much harder at layoffs to make ends meet.
According to several sources, corporate layoffs increased by a factor of 8.5% in 1996 versus 1995. Fortunately the rate declined substantially in 1997, but consider the largest announced layoffs from last year:
|Boeing||12,000 (10% of the commercial aircraft division)|
|Caliber System, Inc.||4,000|
|Donna Karan International||285 (15%)|
|First Bank System||4,000|
|Fruit of the Loom||4,800|
|General Motors||42,000 during the next 5 years|
|Hasbro||700 Closed plant in El Paso
(moving plant to Mexico)
|IBM||Offering 241,000 workers voluntary buyouts|
|Levi Strauss||6,400 Closed 11 plants|
CSAA just announced its intent to layoff 1,200 workers (20% of its workforce); Netscape announced a 20% reduction with 400 layoffs; and Paging Network announced a slashing of 30% of its workforce, with a 1,800 reduction. Philip Morris will cut 1,900 jobs. Sybase announced a 10% reduction, approximately 600 workers. GE Power Systems is cutting 1,200 jobs, or 5% of its workforce (80% of their business comes from outside the U.S.). Will layoffs become more prevalent in this fiery business climate and how well will the reductions play to Wall Street and shareholders when the economy cools off? In the San Francisco Bay Area, we are prone to impact from the “Asia Connection”. Bay Area earnings reports frequently allude to the “flu” as justification for weary earnings. Our trade deficit to Asia soared in December by a factor of 24%. Personal bankruptcies in 1997 were up 25% from 1996. Banks and credit card companies had to write off more than $20 billion to offset these losses. Where does the money go?
Interesting to note was the announcement from Egghead Computer that it will close all of its “stores” and operate solely off revenues produced at Egghead.com. The trend toward Internet shopping is rapidly growing and will have a significant impact on real estate and the general public’s acceptance of the Internet as a seamless business tool for all to use. Skeptics: Check out Dell Computer Corporation’s rocketing stock and their online revenues. Mihalovich.com enthusiasts: Check out the variety of articles in the Guest Articles by Mark Borsuk which specifically and scholastically address the impact of information and technology on retail real estate.
New construction has been impressive. Nationally, the office market inventory has grown as follows: 1997-built-plus-under-construction totals ~43 million square feet, or 2.6% of the nation’s total inventory. At 200 square feet per person, we can accommodate (only) 215,000 new workers. FYI, this is nearly half the number of workers fired in America in each and every year during 1991 through 1996.In the industrial sector, the inventory has grown as follows: 1997-built-plus-under-construction totals ~186 million square feet, or 3.0% of the nation’s total inventory.
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.