Market Insight Editorial & Advice to Tenants: 1Q1998
For the first time since our Bay Area markets started their rocketing rental rates, there are signs that the overheating is beginning to cool: We have negative absorption during the first quarter of 1998, in San Francisco, the Peninsula, Silicon Valley office and Oakland. Only the Contra Costa market showed positive absorption so far this year. Here seems to be proof that the markets are working. Markets always try to tell us something. During the past several months of stratospheric rises in rates, the markets have been telling tenants to shut it off; take your requirements elsewhere; send people home to do their work; lease space in the heretofore off-beat locations in town; leave the county…anything but lease more space in our core areas. When tenants don’t get the message, or can’t help but pursue space where their employees and/or clients require them to be—rates continue to rise, often daily.
Obviously developers have gotten the message, too. In 1999 we expect to see the following new supply of space:
215 Fremont 260,000 sf Equity Office Properties Trust 640 Battery 225,000 sf The Martin Group 475 Brannan 255,000 sf Stein Kingsley Stein 410 Townsend 100,000 sf Rosenberg 625 Second 140,000 sf Rosenberg
In 2000 we are expecting:
101 Second 357,000 sf Myers/Cousins Development 243 Sacramento 60,000 sf Patson Development One Market 350,000 sf The Martin Group 199 Fremont 385,000 sf Fremont Group
150 California 215,000 sf Equity Office/Beacon The Gap Bldg. 450,000 sf The Gap
This list does not include a myriad of smaller renovation projects and other major blocks of space currently or coming on the market in existing buildings, such as:
Levi's Plaza 100,000 sf+ 201 Third St. 160,000 sf Pacific Center II 207,000 sf 1145 Market 75,000 sf 1355 Market 118,000 sf 111 Sutter 240,000 sf 1155 Market 75,000 sf 235 Montgomery 150,000 sf Marathon Plaza 250,000 sf 444 Market 85,000 sf One Market Plaza 80,000 sf One Montgomery 175,000 sf
Does one quarter of negative absorption create a trend in that direction? Hardly, although landlords should begin paying attention to the meteoric rise of rates over such a short period of time and consider getting realistic about locking in some incredible returns at these levels. The fact is that the volume of transactions taking place at these levels—as one would expect—is unimpressive.
Out of this trend we should expect to see major consolidation of space in many metropolitan areas. Where and to what magnitude? As discussed in last issue’s News, the stock markets obviously love this game: Larger market coverage, coupled with domination of the consumer market, coupled with reductions in the workforce to enhance shareholder value. This recipe plays well to the investment community; however, this trend should also give rise to concern in the landlord and real estate investment community about stability in our tenant base. What will become of our most creditworthy tenant base?
The mega-mergers: Travelers/Citicorp. NationsBank/Bank of America. WorldCom/MCI. Bank One/First Chicago NBD. Bell Atlantic/Nynex. Stay tuned, there will be more announcements on a regular basis for quite some time. Keep a watch on the layoff announcements.
We couldn’t help but notice a few announcements, so far this year:
Xerox 9,000 jobs Closing plants to save $1 billion/year Cypress Semi. 100 jobs Closing 3 plants Intel 3,000 jobs Weak demand GTE 1,500+ jobs Cutting costs by $500 million over two years
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.