Market Insight Editorial & Advice to Tenants: 2Q2000
In this Issue:
We’re Making Deals: Meet Our Clients
Internet Capital Group: B2B Giant On The Move:
Mihalovich Partners is proud to have represented Internet Capital Group in its lease at One Market Plaza, San Francisco:
Internet Capital Group, already occupying interim space at One Market, will move into three newly built floors early next year. ICG builds business-to-business (B2B) e-commerce companies, fusing entrepreneurial speed and innovation with unparalleled expertise, support, and infrastructure - to build companies that are transforming the global economy. See http://www.internetcapital.com
Wilson, Sonsini, Goodrich & Rosati. WSGR recently opened their doors in San Francisco, with two Spear Tower floors at One Market Plaza. They will continue to expand their presence here, with an additional two floors in the Steuart Tower. See http://www.wsgr.com.
Majestic, Parsons, Siebert & Hsue. A local intellectual property and trademark law firm, MPSH hired Mihalovich Partners to market their first class space at Four Embarcadero Center. Details about the 12,500 square foot offering can be found at: www.TheSpacePlace.net/office_space/san_francisco/4EC.htm.
Addwater, Inc. Addwater has retained us again to secure new and expanded premises for their offices in San Francisco. Addwater keeps growing its business—web strategy; branding; environmental design; consumer behavior expertise. Watch them sizzle at http://www.addwater.com.
“Calm” After the April Crash
What a difference a crash makes, at least for a few months. Instead of seeing a flock of dot-coms touring from building to building, it was the press in search of dirt about pending failures amongst the Multimedia Gulch crowd. Who’s going to be next? Where is the fallout and what difference, if any, will the releasing of dot-com space into the mix do for the market in general? The fact is that most venture-backed dot-coms that DO intend to fold won’t go out of business tomorrow. They have cash to burn, investors to work out and termination deals to negotiate with their respective landlords. Since most office deals completed during the past year or two will show significant profits today, the dot-bomb can potentially ring the cash register for a few bucks on their office lease.
Leasing activity continued at an impressive pace, in the face of the April stock market “correction”. The Bay Area market stats demonstrate the depth of demand in this marketplace. Vacant space during the quarter declined by a whopping 25% around the Bay Area, although San Francisco’s supply actually increased by 3%. This is not surprising considering that rental rates in the City dwarf those in the East and North Bay counties. Yes, the markets are working, to put some downward pressure on San Francisco rates.
Class “A” @ $100 Rent: VC Cash Still on Hand
According to Goldman Sachs, who should know, there is approximately four (4) times the amount of venture capital available today, versus just one year ago. Perhaps the money is a bit smarter than it used to be, seeding better-managed companies who’ll build companies to last. This is the crop, in large part, responsible for fueling rates to $100 or more in San Francisco and points south in San Mateo and Santa Clara counties. Perhaps we’re now testing a theory: Since most new ventures can’t launch and grow without public capital, perhaps only those with public funding will be able to afford these lofty rents? $100 rates have now been achieved in a number of the trophy buildings in the City: Bank of America World HQ (you’re welcome, Doug); Embarcadero Center; One Market Plaza; and more—and some deals in not-so-trophy buildings, where tenants just had no choice in the matter. Literally.
$400/SQ.FT. Building Sales. The Crush is Coming
Just when you thought Boston Properties blew the lid off building purchase prices at $300/sq.ft. for Embarcadero Center, now we’ve entered the stratosphere of $400+ sq.ft. deals. Of course, these sales make perfect sense when the rent rolls show tenants paying north of $60. So, what is “the Crush” and how do you know when it’s grabbed you by the neck? This is the sound of the landlord on your back, extracting renewal rates on your next rollover. This is the sound of limited space options in the neighborhoods you’ve grown up in, and thought you’d thrive in throughout your career. But where is the “affordable” space? How can one avoid departing the City for Oakland or Livermore or Oakdale?
During 1999’s rapid rise of rates, more specifically in San Francisco, we saw 8 million square feet of total leasing activity. In a 90 million square foot inventory, we replaced less than 10% of the volume of space with “new market” expensive deals. If we replace another 10% in 2000, this will leave 80% of the market—or ~72 million square feet of space to bring up to “market rates”. We have a long way to go before a large enough stealth of tenants “cut and run” and leave enough space behind to soften “the Crush”. Demand appears, still, to be insatiable. Indications, below, may look promising if you know where to look. “Scheduled Vacancy: 12 Months from Now”, in San Francisco, increased 25% from last quarter. San Mateo County’s same supply increased 77%. Perhaps the supplies, buildings under construction, renovation and planned, are finally beginning to weigh on the market. Stay tuned. The stats are always dry, but worth watching.
Oakland: Our Pick-City, Sucking Up Demand
Our former Governor “Moonbeam”, now Mayor Jerry Brown, is doing an awesome job turning things around in Oakland, and turning “on” the development community. At rental and vacancy rates far more attractive in Oakland than elsewhere in San Francisco or south, Oakland’s leasing activity has been screaming:
Net absorption of space in Q2, 2000 was 360,000 square feet, 54% higher than any quarter in the past two years. Oakland is easily drawing demand from across the Bay, and now contains 20% of the total vacant space in the East Bay region. This represents more vacant and available space than in San Mateo and Santa Clara counties combined!
Looking at space alternatives available within the next 12 months, Oakland’s 2.86 million square feet scheduled for vacancy (now on the market) represents 32% of the total supply coming from the East Bay. With these dynamics, Oakland will continue to be a thriving magnet for deals during the next few quarters. Markets DO work, and eventually tenants will figure out a way to narrow the enormous spread between Oakland’s economics and those of San Francisco. Who’s next to vacate the big City? The line is forming at Jerry’s front door…
San Francisco Bay Area Market Stats:
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.