Market Insight Editorial & Advice to Tenants: 3Q2002

From Dan Mihalovich [[email protected]], Principal of Mihalovich Partners and Founder of The Space Place®:

Here to Represent You, for 20 Years.

Thank you for dropping by our website. Now in my 20th year representing tenants in office leasing transactions, I want to remind you that we’re available to discuss your firm’s office leasing issues; the scores of opportunities available to accommodate your needs; the leasing process, and our role as your representative; and our recommendations for your firm, considering where the market is and where it’s heading. Please feel free to call us!

This website, an integral part of our resources, serves as an example of the quality you can expect from our representation services—but also as a tenant community builder. We offer free educational articles in our Guest Articles written by many of the community’s most talented professionals. The articles are written by real estate lawyers, architects, contractors, tax consultants and others, all of whom I have come to know through direct experience over the years. After 20 years representing tenants, I recognize invaluable advice when I hear it, and do everything possible to encourage contributions to this site for your benefit. Please enjoy, and participate.

Below Freezing: Eight Straight Quarters of Sub-Zero Growth

The proverbial “bottom”: Have we hit it? Usually, we are eager to speak to the press to answer questions such as this one. Unfortunately for our economy and the public’s well being, the clear and disappointing answer is “no”, not by a long shot. Our clients, all tenants, can look years ahead to a leasing market ripe with opportunity—although the true opportunity for most is to consolidate space, perhaps to relocate to a more tenant-friendly building, but to lock in long-term palatable economics. The dire condition of San Francisco’s marketplace [link], and most in the Bay Area, now stands at extreme-pain levels. More important to tenants, of course, is the unshakable fear of the economy, of pending war, and the prospect of losing one’s job. California now accounts for 25% of the national total of mass layoff unemployment claims. Not surprisingly, we have just completed yet another quarter of negative growth—in EVERY Bay county. Asking rental rates are down 4%-12% in EVERY Bay county since Q2. Vacancies are up 5%-11% in EVERY Bay county. The details, by market, are reflected in the following charts:

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.

“Vacancy 101(a)”: “Vacancy” Defined. What’s On the Market?

We consider San Francisco County to be 20% vacant.
We consider San Mateo County to be 25% vacant.
We consider Santa Clara County to be 19% vacant.
We consider East Bay Counties to be 13% vacant.
All Counties upon which we report are, on average, 19% vacant.

Who wants to know?

Landlords, tenants, brokers, lenders, appraisers, and the press may all view the market differently. However, we see it very simply—our way:

“Vacancy”, economically speaking, refers to a state of the marketplace, all inclusively. “Vacant” space, to us, means that space is available for lease, and occupiable within the foreseeable future (within the next 12 months)—AND that no condition exists which could prevent the space from becoming occupiable. For example, if a developer files for a permit to build or renovate a building, yet it is not under construction, we do not consider this space to be “vacant” and readily available for lease. Once under construction, however, we assume that completion is inevitable—even though today’s market dynamics are dictating shutting down prospective new developments. If the space will hit the market, we consider it to be “vacant”.

Never mind that “vacant” space—as measured by so many of the large, national commercial real estate firms—counts space that is vacant and occupiable at this moment, only. This is only a partial bellwether, which is the driving rationale for reporting to you on all vacancies available throughout the next year. Unfortunately, none of us in the industry can properly measure the last piece of the puzzle, to most accurately complete the portrayal of vacancy—by also counting square footage (likely to be in the millions of square feet) of underutilized space which, for a variety of reasons, is not yet officially “on the market”.

Last 45 Days of Q3—4 Million Sq. Ft. of New Listings

The pace of new vacancies is not slowing. Here is the count for direct and sublease office space, new to the market in the last 45 days. County for county, along the San Francisco Bay, tenants and landlords have continued to dump space…Four million square feet, in just the last 45 days of the quarter. Total available, a staggering 55 million square feet of office space on the market in the San Francisco Bay Area. Underutilized and yet to be marketed space from bankrupt or bailing tenants is not factored into these figures.

San Francisco County: 1,360,000 square feet
San Mateo County: 535,000 square feet
Santa Clara County: 1,200,000 square feet
East Bay Counties: 985,000 square feet

Tenants: Stand Up and Be Counted! This is YOUR Market.

Every tenant’s leasing scenario is individual, so we hesitate to make blanket statements to serve all tenants. Note, however, that many tenants are beginning to sense opportunity. We are seeing numerous shoppers with 2004, 2005 and even 2006 lease expirations circling about. It would be beneficial for us to meet and begin a preliminary analysis of your situation, whether for a potential early renewal or to evaluate relocation alternatives. This is not the time to be shy, but rather to stand out in the marketplace as a viable “cure” for many an ailing landlord. “Workout” deals have become commonplace—deals requiring lease assumptions or heavy tenant improvement buildouts. Unless you initialize the first small steps to create your team of experts (broker, architect and contractor to start); qualify your requirements; and open up discussions with 5 or more landlords…you’ll potentially miss some compelling opportunities. You need to dictate progress in this kind of marketplace. Tenants are golden and we’ll help you shine!

Crunch Time: Space Plan, Renovate to Reduce Square Footage

It’s no surprise that brokers earn larger fees when clients lease more square footage. Or, better yet for brokers, when their clients commit to “must-take” expansion space, rather than securing “options to expand”. However, it's been our experience, that what our clients most need is LESS initial space, coupled with the ability to exercise expansion options at future dates of convenience. We work to negotiate such options—to take, or not, space in the future—which will be carried at the landlord’s risk and expense until then.

Most often our new tenant clients have in mind a square footage requirement when we first meet. Our goal, remember, is to establish

  1. usable square footage for initial occupancy;
  2. best guestimates for square footage after Year 3 of the lease; and
  3. potentially more option space at Years 6 and 8 for longer term leases.

Tenants are best served by identifying these requirements at the outset of the process—an exercise choreographed by the tenant-team space planner. Speaking of which, our Guest Articles section contains many articles by space planning firms. One article on topic—“Space Planning: How Much Space Do You Really Need?”—does a fine job illuminating the factors to consider.

Lease what you need, nothing more. If the prospective new landlord is uncooperative when it comes to options for you to expand, consider this to be an omen for concessions—or lack thereof—in the future.

Further reading on our website: "Space Planning: How Much Space Do You Really Need?" does a fine job illuminating the factors to consider. http://www.thespaceplace.net/articles/fennie200501a.php

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.

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