Market Insight Editorial & Advice to Tenants: 1Q2003

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

We are trying to count our blessings. Unfortunately, 2003 came in like an unwanted houseguest, with a foul gift that keeps on giving. And now we are at war. Q1 ’03 will go down in history as the sequel to the ’91 Gulf War, with equal punch to the economic belly of the country. This is not pessimism, but rather a wrenching confrontation with reality. We would prefer to focus on business as usual, but there is nothing usual about it these days. Our nation is conflicted, between rallying for peace and routing out enemies. Every day we face CNN, reporting live on death in the battlefield and dissolution on Wall Street. To whom should we show more compassion? The unemployed? The homeless? The men and women fighting in Iraq? And when will confidence return, to our families, our businesses, our nation? Here, we report on a rather minuscule facet of the world’s on goings. Yet I find some comfort in sharing my expertise about the office markets in the San Francisco area. After living, working and writing in this market for over 20 years, the market is like an old friend. We can all use an old friend about now. Peace to all.

Mihalovich Partners Closes 2003’s Largest San Francisco Lease

We are extremely pleased and proud to announce that our client, The California Academy of Sciences [www.calacademy.org], has leased the entire 875 Howard Street Building, encompassing 204,000 square feet. This transaction, to date, is the largest lease to close in San Francisco, and represents one of the most interesting and challenging tenant representation assignments of our 21-year tenure. Located across the street from the new Moscone West Convention Center on 4th Street, 875 Howard will serve as the temporary home for the Academy’s aquarium and exhibits, scientific collections, research scientists and administrative facilities. The Academy signed a four-year lease that extends through the end of 2007, with options to renew. The Academy will return to Golden Gate Park in 2008 upon completion of the rebuilt Museum.

We are proud to add the Academy to the list of prestigious tenants we have represented in the Bay Area. We would be pleased to meet with you to discuss your leasing needs and describe our tenant representation services in further detail. Whether you are looking to gain leverage in negotiations with your current landlord, or are interested in the opportunities a relocation effort would offer, Mihalovich Partners can guide your firm through every phase of a leasing transaction.

War, Economy, Deficits Blight Office Demand

Office demand in the San Francisco Bay Area continued its downward trend, as local economies stagnated under the pressure of rising business failures, soaring unemployment and general apathy resulting from the Iraqi Freedom War. Vacancy rates increased in every Bay county. We are up to nearly 57 MILLION square feet of availabilities on the market throughout the Bay Area, with nearly 20 million of the total in San Francisco. Q1, 2003 is the NINTH consecutive quarter of negative absorption of space. All told, Bay Area net absorption was NEGATIVE 1.6 million square feet, of which more than half was in San Francisco. As we’ve stated many times previously, we cannot possibly be at the proverbial “bottom” of the market with fundamentals such as these.

The war in Iraq will have a deleterious effect on our nation’s economy for the foreseeable future. We have no delusions of waking up and finding that a bad movie has ended and that everything is OK. This war, establishing a stable government in Iraq and rebuilding that country represents a process, and not an event, which will take an enormous national effort to accomplish successfully. As long as an active campaign against terrorism thrives, our focus on policies abroad will drain our nation’s ability to rebound from this recession, enhancing the possibility that our economy further deteriorates.

The horrendous and growing deficit in California will receive prime time in May, when legislators are expected to officially enact their plan for combat. Local governments are the most vulnerable due to receding Federal/State aid, coupled with declining tax receipts. The realities resulting from California’s fiscal crisis and junk bond rating are daunting to overcome, and will most likely curb business spending even further than at present.

Trend in Asking Rents—Current v. Year-end 2000

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 Rates—Current v. Last Quarter + Forecast

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.

Earnings, Space Absorption and Other “Funny”-Stuff

Do you trust earnings reports from Wall Street, yet? According to Huron Consulting Group [www.huronconsultinggroup.com], corporate earnings restatements were up 22% in 2002, wiping out billions of dollars in reported earnings. By year 2002, approximately 330 corporations (vs. 270 in 2001) changed their financial tune. Note that the number of large companies reporting doubled, from 39 to 74.

We are constantly looking at the State’s reports on unemployment. Since the average employer devotes approximately 200 square feet per employee, unemployment figures are a telltale for office occupancy/vacancy rates around the State. In March, guffaw, the State realized that it had grossly underestimated job losses in the San Francisco and San Jose areas…by 150% and 54% respectively, off by 114,000 jobs—about 23 MILLION square feet worth of space! Fortunately, we do not rely upon Government reporting for our commercial real estate research.

In Mayor Willie do we trust…to deal with a larger than expected budget deficit in San Francisco County, now projected to be $350 million. Slated to address the mess: fee increases; a jail closure; job reductions; and delaying road repairs. Of course, Governor Davis will have a direct effect on the City’s budget problems, since the Gov’ is after everyone to chip in on the $35+ billion State deficit. This battle is getting uglier every day, and all of us will have to pay for it.

Commercial Real Estate Industry: Is There Any Competition Left?

If you are a TENANT, this is an interesting story. If you are an office leasing broker, this is entertainment:

International commercial real estate giant CB Richard Ellis, the 4th largest controller of office space listings in San Francisco (see the chart below), announced its plans to acquire New York-based powerhouse Insignia/ESG, #7 on the list below. Following that shake-up, CB announced that it would acquire Bay Area regional BT Commercial, #15 on the list. The combo will put CB at the top of the heap of companies in San Francisco which controls the most space available on the market—far more than Equity Office Properties, Boston Properties or The Shorenstein Company. CB will unseat The CAC Group as the biggest landlord representative in the City.

So, the top four brokerage firms (CB, CAC, Cushman & Wakefield and Colliers) will control nearly 50% of the space on the market. Since we compete with these firms to represent the interests of tenants (we NEVER represent landlords), we are always curious how tenants imagine that they will receive objective advice from firms who serve so many landlords in the City.

Who Has the Most Space in San Francisco? Surprise…

When we approach a prospective new tenant client, we tell them that we NEVER represent landlords, always avoiding this conflict of interest. So, which leasing firms do the most landlord representation, and who controls the most space in San Francisco? And, most importantly, would you feel comfortable having them represent YOU?

Below we’ve surveyed the entire 106 million square foot inventory of San Francisco, and illustrated the companies with the most control of space on the market, the Top 25. You know from our other stats that 20 million square feet is now on the market in San Francisco. The top 4 companies, all office leasing brokerage firms, control nearly 50% of the City’s vacancy, more than Equity Office Properties (#5), the country’s largest REIT; more than Shorenstein (#13); and more than Hines (#12) or Boston Properties (Embarcadero Center). Surprised, are you not?

Top 25 companies By Space Inventory

% Market Share Square Feet
1 The CAC Group 12.4% 2,703,813
2 Cushman & Wakefield of California 8.4% 1,836,812
3 Colliers International 7.5% 1,641,553
4 CB Richard Ellis 7.3% 1,599,629
5 Equity Office 4.3% 932,822
6 Tishman Speyer Properties 4.1% 903,663
7 Insignia/ESG, Inc. 4.1% 887,149
8 GVA Whitney Cressman 3.6% 790,220
9 Grubb & Ellis 3.6% 777,270
10 Wilson Meany Sullivan LLC 3.5% 753,275
11 Catellus Urban Development Corp. 3.1% 673,548
12 Hines 2.9% 637,607
13 Shorenstein Realty Services, LP 2.6% 567,383
14 Jones Lang LaSalle Inc. 2.2% 487,363
15 BT Commercial Real Estate - NAI 2.1% 449,401
16 Starboard TCN Worldwide Real Estate 1.9% 407,285
17 Boston Properties 1.8% 394,494
18 The Presidio Trust 1.5% 323,912
19 Newmark Pacific 1.5% 323,339
20 Coldwell Banker Walker Pacific 1.4% 309,363
21 TRI Commercial/ONCOR International 1.3% 275,713
22 Rosen Realty Group 1.1% 242,072
23 William Spencer Co. Inc. 1.1% 240,000
24 HC&M Commercial Properties, Inc 0.8% 165,703
25 Transwestern Commercial Services 0.7% 162,010
% refers to the percentage of vacant space under exclusive listing by each company. The accompanying figure is the actual square footage available for lease.

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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