Market Insight Editorial & Advice to Tenants: 3Q2003

Message from Dan Mihalovich, Principal of Mihalovich Partners and Founder of The Space Place®

Voters of San Francisco, Friends and Clients:

The Mayoral Candidates will speak to you, here, at our website. I invited the top contenders for the Mayor’s spot to submit their economic plans for viewing by the Business Community.

Angela Alioto

Read Angela Alioto’s economic outlook for San Francisco:
Top Three Priorities with Regard to Economic Development [pdf]


Matt Gonzalez

Read Matt Gonzalez’s economic outlook for San Francisco:
Putting San Franciscans First: Employing San Franciscans and Creating Sustainable Communities Builds Our Economy [pdf]


Susan Leal

Read Susan Leal’s economic outlook for San Francisco:
Building an Opportunity Economy [pdf]


Gavin Newsom

Read Gavin Newsom’s economic outlook for San Francisco:
A Thriving Economy, A Thriving City: A Plan to Develop and Support Small and Local Business [pdf]


Tony Ribera

Read Tony Ribera’s economic outlook for San Francisco:
Top Three Priorities with Regard to Economic Development [pdf]


We are pleased to post their respective plans for you—to assemble and “push” this information to you in time for the election on November 4th. There is so much at stake, since our local economy has suffered so intensely during the past few years. Business leaders constantly ask: “Is this the bottom? Have we turned the corner? What’s in store?” Please, read on to learn more about the Candidates, and their answers to these questions. We will need inspirational leadership in City Hall to breathe new vitality into this City. Hope springs eternal. Get out the vote.

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

Hit and Run: Market Absorption Strikes Out

San Francisco Bay counties reported 530,000 square feet of positive growth (more space leased than brought to market) in Q3. This is the first time in eleven consecutive quarters that positive absorption has been attained in San Francisco. We reported this phenomenon to the press, mid-quarter, since this tidbit of “healthy” news would likely enliven our community. Our Press Release on August 25, became material for a number of publications. Unfortunately for the “recovery”, Q3 did not finish with the same leasing vigor as it began. Our mid-quarter press release reported 778,000 square feet of positive absorption. Though Q3 possessed positive growth, the results in the second half of the quarter represent negative growth of 248,000 square feet!

One of our most revealing telltales for future market balance (or lack thereof) is the report on office space available within the next 12 months, which now weighs in at over 56 MILLION square feet in the San Francisco Bay region. At the current rate of absorption around the Bay, that’s enough vacancy to last 26 years, with no new commercial buildings coming to market.

The markets (landlords) will use whatever positive news there is to pump life into its broken body parts. Net absorption of space, after all, was positive in San Francisco, San Mateo and Santa Clara counties. That said, asking rental rates for direct and sublease space declined in all areas—again—with the exception of direct space in San Mateo county, up 2% from Q2. One final factoid: 530,000 square feet of absorption pales in comparison to Bay Area commercial real estate inventory of over 325 MILLION square feet.

Rent vs. Revenue: How Much Should You Pay?

Consider this to be hallowed ground: Do not commit more than 10% of your gross revenue to rent. Lower single digits would be better. In 21 years of representing tenants in office leasing negotiations, we always ask our prospective clients about this ratio, and use this data to:

  • Determine the viability of the prospect’s business. If the ratio is too high (recall the dot-com days when there was NO revenue), we have to think twice about committing our time to work on such a project. Bear in mind that landlords who would otherwise be competing to secure such a tenant will balk at entertaining a lease, or concoct an unbearable requirement for security for the lease.
  • Help drive the transaction to buildings where the proposed rental stream for the term of the lease will comfortably allow our client to remain in this “zone”.
  • Expand the discussion to ensure that the tenant-client recognizes that other key expenses, such as unamortized tenant improvement costs; financed furniture, fixtures and equipment; operating and tax escalations; moving costs; architectural, mechanical and electrical drawings/fees; and other transaction-related costs all factor into the “rent” vs. revenue discussion.

How much rent are YOU able to pay, and should landlords care about your budget? Is it possible that there is a ceiling on rental rates in San Francisco (and elsewhere) predicated on what tenants can afford to pay to continue to operate at a reasonable level of profitability? Yes, of course. And we would be pleased to discuss this topic with you further.

Crystal Bawling: Consumer “Confidence”, Jobs, Debt. Repeat.

We have a crystal ball in our window on Montgomery Street. Beyond its utility as a paperweight, the crystal ball seems to remain a primal tool for Wall Street and the cottage industry of American Economists. Failing clarity, economists rely upon the short-term memory of investors. We read about consumer confidence reports with utter disbelief. How can Americans and businesses demonstrate confidence (and measure confidence?) when we are at war and living on the edge of the next terrorist explosion? To what have Americans had to become accustomed in order that we show confidence in spending and job security? Shall we ignore our soldiers dying in the field? Our skyrocketing National, State and Local debt? A few billion dollars each month toward fighting in Iraq? Mounting jobless claims and the homeless? We are experiencing a “jobless recovery”, so the pundits argue. We cannot translate these phenomena into growth of our office markets. Jobs are moving overseas in this global economy. But we will reinvent ourselves into new positions, yes? Will biotech save San Francisco? Nanotechnology? We don’t see it, sadly.

For the moment, we are completely skeptical about stats from the Feds. Remember, we are going into an election year. The White House is at stake. Investors, bitten hard, are skeptical of corporate reports. Figures are published and re-written months later. Estimates of the cost of the War on Terrorism have made fools of many of us. We simply are not in a period of Confidence. It was just yesterday that we had difficulty hand-counting ballots to elect a President.

Here is our crystal bawl: It wasn’t long ago that San Francisco buzzed like no other. If the “recovery” doesn’t materialize (we do not see it, obviously) while interest rates are this cheap, and while we are in an election year, watch out below. We do look forward to a longer-lasting revival (than the dot-com era) in the years to come. We don’t know from whence it shall come, but rather envision we have several years of sluggishness to sift through before we taste it. The market’s weight is exceedingly heavy for now, but we will do our best to be optimistic.

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.

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 18 million square feet is now on the market in San Francisco. The top 4 companies, all office leasing brokerage firms, control nearly 40% of the City’s vacancy, more than Equity Office Properties (#6), the country’s largest REIT; more than Hines (#9); and Shorenstein (#12) or Boston Properties (Embarcadero Center, #13). Surprised, are you not?

Top 25 companies By Space Inventory

% Market Share Square Feet
1 CB Richard Ellis 11.8% 2,325,840
2 The CAC Group 10.8% 2,127,266
3 Cushman & Wakefield of California 10.7% 2,108,767
4 Colliers International 4.7% 923,621
5 Tishman Speyer Properties 4.6% 903,663
6 Equity Office 4.4% 867,893
7 Catellus Urban Development Corp. 3.7% 718,548
8 GVA Whitney Cressman 3.3% 651,011
9 Hines 3.2% 625,491
10 Grubb & Ellis 2.6% 519,809
11 Jones Lang LaSalle Inc. 2.6% 517,682
12 Shorenstein Realty Services, LLC 2.5% 495,152
13 Boston Properties 2.5% 490,461
14 BT Commercial Real Estate - NAI 2.4% 481,041
15 The Presidio Trust 1.6% 306,093
16 Starboard TCN Worldwide Real Estate 1.5% 289,877
17 Newmark Pacific 1.4% 284,772
18 Catellus Development Corporation 1.4% 283,000
19 Poszots Associates 1.4% 280,000
20 TRI Commercial/ONCOR International 1.4% 274,368
21 Coldwell Banker Walker Pacific 1.3% 264,448
22 HC&M Commercial Properties, Inc. 1.3% 257,097
23 Wilson Meany Sullivan LLC 1.2% 238,852
24 Transwestern Commercial Services 1.0% 186,964
25 Arroyo & Coates 0.8% 154,049
% 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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