Market Insight Editorial & Advice to Tenants: 1Q2013
In this Issue:
- Rents Head To The Moon. Will You Follow?
- 51.6 Million Square Feet (Up from 49.6) On the Market
- Top Five Leasing Transactions by County for 1Q 2013
- Vacancy Rates: Are Your Options Fading?
- Take Me Straight To The Numbers: San Francisco Bay Area Rental Rates. Supply / Demand.
- Who Has The Most Incentive To Drive Up Rental Rates In San Francisco?
How many alternative spaces are available to you to suit your requirement? Isn’t this part of the core litmus test of how soft or tight the market really is?
See our chart below where we track the changes for all size ranges of tenants in these reports every quarter. If you want real-time data, please call me.
If you’re in search of intelligent life in the brokerage community, please enjoy this Editorial with my compliments. For more historical perspective, feel free to peruse the last 15 years of my pearls of wisdom.
President, Mihalovich Partners
Founder, The Space Place®
Rents Head To The Moon. Will You Follow?
Just outside our San Francisco / Silicon Valley hamlet, cooler heads and tighter budgets prevail with respect to the U.S and global economy. But here, the water’s warm…to boiling. Office deals are approaching Dot Com levels and tenants — particularly non-VC-backed-tenants — are reeling. The question is whether to jump into the fray or bail out to cheaper space somewhere else.
Is it becoming too expensive to grow a company in San Francisco? And if the larger economy, here and abroad, declines, will tenants continue to absorb the risk of such lofty financial commitments?
Everyone talks their own game. Tenants might pay attention to some of the bearish sentiment in the marketplace. Following are three pithy bits about our economy, none of which add fuel to the bull-herd-mentality at play in San Francisco Bay Area office marketplaces.
Do you need another crash to remind yourself to beware of the Wall Street pundits? With that grain of salt, here are the pearls of Zanny Minton Beddoes, an anonymous stock trader, and David Stockman…
Zanny Minton Beddoes—Economics Editor at The Economist
Recently I attended Zanny Minton Beddoes’ Speaker Series keynote address and thought her provocative comments would be insightful for you. Beddoes oversees the magazine’s global economics coverage, managing a team of writers around the world.
Here were her pearls about the state of the economy, U.S. and otherwise:
- Seven years after the collapse of Lehman Brothers, we remain in a lackluster recovery.
- Abroad, it’s far worse...and will depress in several parts of Europe.
- 2012 represented the slowest growth since the Depression.
- The only thing floating our economy is cheap money.
- Looking to Wall Street, stocks look terrific, which begs the question: What’s doing this and is it sustainable?
- Could the Euro collapse? Highly improbable. Germany is highly supportive of the Euro.
- U.S. housing is improving. Private companies look better. Japan’s leadership is working hard to end deflation.
Other bright spots:
- Growth of exports
- Composition of exports (games, consulting, shale gas/natural gas) could lead to a durable, solid recovery
- Fiscal tightening in Washington DC could dampen the prospects.
- Grinding austerity in Europe is extremely harmful and dangerous. There is no growth. They have no prospects in the medium term.
- 2012 emerging economies really suffered, including China, Brazil and India.
- 5-10 year forecast is looking grim:
- No more double-digit growth in emerging countries.
- Demographics look discouraging. Labor forces are shrinking.
- Debt levels, public debt is out of control.
- Unemployment and underemployment levels are far too high. Europe is currently at 11.9%
- Inequality: 2/3 of the world’s population lives in economies where the gap between rich and poor has risen dramatically within the last few years. This will cause political and economic instability, especially in the “rich” economies.
- U.S. has the world’s most complicated tax system. Letting it fester (without getting political, here) will prolong instability. Resolving many of the system’s faults could quickly add fuel to the economy.
More contrast from a Wall Street insider, just a few of weeks ago
There’s been a lot of chatter in the markets about the Dow making new highs and the comparison of where things were back in 2007 at those highs. Here are some of the stats that were being bandied about:
- GDP Growth then was 2.5%, today its 1.6%.
- Food Stamp usage then was 26.9mm, now 47.7mm.
- Unemployed Americans then 6.7mm, now 13.2mm.
- Fed’s Balance Sheet then $0.89Tln, now $3.01Tln.
- US Debt Outstanding then $9Tln, now $16.4Tln.
- Debt as a % of GDP then 38%, now 74%.
- S&P Rating of the US then AAA, now AA+
- Gold then $748, now $1575.
- 10yr TSY yield then 4.64%, now 1.9%.
So it’s sort of amazing that the price appreciation of a basket of paper items has appreciated as much as it has while the underlying foundation of which those pieces of paper are based on has deteriorated as much as it has.
Amazing what an inflationary asset push can do. (But there is no inflation.)
With rates at or near zero for 5 years, the underlying item that prices most everything else has ballooned everything.
But there are a few counterpoints to the above statistics that put some common metric perspective to the current market:
- SPX trailing P/E Oct 2007 17.3x & now 15.2x
- SPX trailing P/S Oct 2007 1.6x & now 1.4x
- SPX trailing P/B Oct 2007 2.9x & now 2.3x
He added that with correlation continuing to fall and favoring the stock pickers…and volatility as low as it’s been, figuring out when this will all end has been a mug’s game. He’s right.
David Stockman, Budget Director for President Reagan
And from David Stockman, Budget Director for President Reagan, a gut-wrenching and (prepare yourself) dark view of things to come in his article “State-Wrecked: The Corruption of Capitalism in America”
51.6 Million Square Feet (Up from 49.6) On the Market
The Bay Area supply of space increased 4.0% from 49.6 million square feet in Q4 to 51.6 million in Q1 2013.
Currently available office space has remained on the market for 2 years or longer! The average time on the market for all available space continues to amaze, an indication of the frothiness of the market insofar as building owners appear content to let space sit idle in expectation of ever higher rental rates down the road.
Tenants in tighter markets feel this pain, since landlords are in little rush to make a cheaper deal today than they believe they can make tomorrow.
Q1, 2013 in the San Francisco Bay Area wrapped up as follows:
sq. ft. available (millions)
|last quarter||average time
on market (months)
|San Mateo County||7.3||7.0||22.7|
|Santa Clara County||14.1||14.5||28.3|
|Contra Costa &
Top Five Leasing Transactions by County for 1Q 2013
101 Spear Street
|228,721 sq. ft.|
1455 Market Street
|85,111 sq. ft.|
180 Sansome Street
|48,939 sq. ft.|
|4||McKenna Long & Aldridge, LLP
1 Market Street
|42,288 sq. ft.|
810-814 Mission Street
|30,691 sq. ft.|
San Mateo County
1600 Seaport Blvd
|24,476 sq. ft.|
303 Twin Dolphin Drive
|19,864 sq. ft.|
959 Skyway Road
|17,555 sq. ft.|
395 Oyster Point Blvd
|15,378 sq. ft.|
2955 Campus Drive
|14,154 sq. ft.|
Santa Clara County
601 McCarthy Blvd
|187,134 sq. ft.|
2600 Great America Parkway
|165,000 sq. ft.|
2525 North First Street
|75,432 sq. ft.|
2589 Samaritan Medical Center
|74,800 sq. ft.|
3965 Freedom Circle
|73,088 sq. ft.|
Contra Costa &
|1||Livermore Valley Charter School
3090 Independence Drive
|38,449 sq. ft.|
1387-1401 Marina Way South
|32,745 sq. ft.|
|3||Alameda Unified School District
2060 Challenger Drive
|26,720 sq. ft.|
2100 Powell Street
|24,027 sq. ft.|
|5||Alameda County Transportation Management
|23,970 sq. ft.|
Vacancy Rates: Are Your Options Fading?
Tenants should watch carefully to detect how and to what extent your field of options changes. Which size blocks of space are getting leased?
Discussing vacancy and absorption rates can be confusing to some. What language makes sense to tenants? Tenants ask, “Tell me about my specific options. How many choices do I have?”
Are your options fading as a result of leasing activity? Review the chart, below, and let’s discuss.
|Blocks of Space Available (sq.ft.)||San Francisco County||San Mateo County||Santa Clara County||East Bay Counties||Total Change in # of Blocks Available|
|▲ 4%||0||▼ 15%||▼ 2%||▼ 4%|
|0||▲ 3%||▼ 8%||▼ 1%||▼ 2%|
|▲ 30%||▲ 23%||▲ 16%||▲ 7%||▲ 18%|
|▲ 15%||0||0||▼ 8%||▲ 1%|
|0||0||0||▲ 13%||▲ 4%|
|▼ 2%||▲ 3%||▲ 2%||▲ 5%||▲ 2%|
You can request a free space survey, containing all direct and sublease space meeting your specific requirements. We can also provide building photographs, floor plans, leasing histories and more. You’ll receive your survey within one business day. To discuss your space needs in person, call 415-434-2820 or email dan@TheSpacePlace.net.
Take Me Straight to the Numbers: San Francisco Bay Area Rental Rates. Supply / Demand.
Who Has the Most Incentive to Drive Up Rental Rates In San Francisco?
When we approach a prospective new tenant client, we tell them that we NEVER represent landlords, always avoiding this conflict of interest. So, which of our competitors—leasing firms—do the most landlord representation? Who’s marketing the most space in San Francisco?
Below we’ve surveyed the entire 113 million square foot inventory of San Francisco, and illustrated the Top 25 companies listing the most space on the market. Of the top 7 companies, 6 are office leasing brokerage firms, controlling 65% of the City’s vacancy!
These brokerage firms are beholden to 400 local landlords, paid to drive up rental rates and drive down concessions for tenants.
Since their allegiance is committed to so many landlords, how can they possibly represent YOUR interests—the tenant’s interests—objectively and aggressively?
The top brokerage companies on the list control more of the City’s vacancy than Tishman Speyer, Shorenstein, Boston Properties and Hines. Surprised, are you not?
|% Market Share||Square Feet||# of Landlords/ Buildings|
The % in the chart below refers to the percentage of vacant space under exclusive listing by each company. The accompanying figure is the actual square footage available for lease. We have also noted the number of landlords / buildings represented by each entity.
* Denotes listing brokers. All other companies listed are landlords/developers.
|2||*The CAC Group||11.6%||2,217,937||73|
|3||*Cornish & Carey Commercial Newmark Knight Frank||11.2%||2,140,658||53|
|4||*Jones Lang LaSalle||9.8%||1,869,227||56|
|6||*Cushman & Wakefield, Inc.||8.0%||1,533,956||54|
|9||Shorenstein Properties, LLC||3.3%||625,054||7|
|13||*TRI Commercial / CORFAC International||1.2%||237,252||47|
|14||Alexandria Real Estate Equities, Inc.||1.1%||215,370|
|15||Boston Properties Limited Partnership||1.0%||185,016||4|
|16||Kilroy Realty Corporation||0.9%||180,000|
|18||*Starboard TCN Worldwide Real Estate||0.8%||148,074||37|
|19||*Sansome Street Advisors, Inc.||0.6%||117,358||14|
|21||The Presidio Trust||0.5%||90,931||44|
|22||Colton Commercial & Partners||0.5%||90,524||23|
|24||The Carlyle Group||0.4%||82,134|
|25||Gate Capital Properties LLC||0.4%||80,694|