Market Insight Editorial & Advice to Tenants: 1Q2013



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.

Dan Mihalovich
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:

current
sq. ft. available (millions)
last quarter average time
on market (months)
San Francisco 14.2 13.6 25
San Mateo County 7.3 7.0 22.7
Santa Clara County 14.1 14.5 28.3
Contra Costa &
Alameda Counties
15.8 15.6 28.0

Top Five Leasing Transactions by County for 1Q 2013

San Francisco

1 Salesforce.com
101 Spear Street
228,721 sq. ft.
2 Square, Inc.
1455 Market Street
85,111 sq. ft.
3 RocketSpace
180 Sansome Street
48,939 sq. ft.
4 McKenna Long & Aldridge, LLP
1 Market Street
42,288 sq. ft.
5 Everest College
810-814 Mission Street
30,691 sq. ft.

San Mateo County

1 ZenBanx
1600 Seaport Blvd
24,476 sq. ft.
2 Kondi
303 Twin Dolphin Drive
19,864 sq. ft.
3 Mastercard
959 Skyway Road
17,555 sq. ft.
4 Sunesis Pharmaceuticals
395 Oyster Point Blvd
15,378 sq. ft.
5 NetSuite, Inc.
2955 Campus Drive
14,154 sq. ft.

Santa Clara County

1 Samsung
601 McCarthy Blvd
187,134 sq. ft.
2 GlobalFoundries
2600 Great America Parkway
165,000 sq. ft.
3 eBay, Inc.
2525 North First Street
75,432 sq. ft.
4 Stanford Hospitals
2589 Samaritan Medical Center
74,800 sq. ft.
5 CA Technologies
3965 Freedom Circle
73,088 sq. ft.

Contra Costa &
Alameda Counties

1 Livermore Valley Charter School
3090 Independence Drive
38,449 sq. ft.
2 -
1387-1401 Marina Way South
32,745 sq. ft.
3 Alameda Unified School District
2060 Challenger Drive
26,720 sq. ft.
4 Sutter Health
2100 Powell Street
24,027 sq. ft.
5 Alameda County Transportation Management
1111 Broadway
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
Q1’13 Q4’12 Q1’13 Q4’12 Q1’13 Q4’12 Q1’13 Q4’12 Q1’13 Q4’12
5,000–9,999 316 305 110 110 240 282 353 360 1019 1057
▲ 4% 0 ▼ 15% ▼ 2% ▼ 4%
10,000–19,999 199 199 64 62 116 126 159 160 538 547
0 ▲ 3% ▼ 8% ▼ 1% ▼ 2%
20,000–29,999 69 53 32 26 43 37 66 62 210 178
▲ 30% ▲ 23% ▲ 16% ▲ 7% ▲ 18%
30,000–39,999 29 26 13 13 15 15 23 25 80 79
▲ 15% 0 0 ▼ 8% ▲ 1%
40,000–49,999 15 15 5 5 11 11 17 15 48 46
0 0 0 ▲ 13% ▲ 4%
50,000+ 49 50 62 60 143 141 61 58 315 309
▼ 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 [email protected].

Take Me Straight to the Numbers: San Francisco Bay Area Rental Rates. Supply / Demand.

Review the latest Market Trends in detail.

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.

1 *Colliers International 13.6% 2,604,720 107
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
5 Hines 8.9% 1,691,089 8
6 *Cushman & Wakefield, Inc. 8.0% 1,533,956 54
7 *Kidder Mathews 5.1% 970,883 42
8 Tishman Speyer 4.7% 896,540 5
9 Shorenstein Properties, LLC 3.3% 625,054 7
10 *CBRE 3.2% 609,627 22
11 *Cassidy Turley 1.9% 363,510 32
12 *Avison Young 1.5% 288,355 5
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
17 Flynn Holdings 0.9% 172,572 2
18 *Starboard TCN Worldwide Real Estate 0.8% 148,074 37
19 *Sansome Street Advisors, Inc. 0.6% 117,358 14
20 Regus 0.5% 91,600
21 The Presidio Trust 0.5% 90,931 44
22 Colton Commercial & Partners 0.5% 90,524 23
23 Studley 0.4% 83,309
24 The Carlyle Group 0.4% 82,134
25 Gate Capital Properties LLC 0.4% 80,694
  Total   19,099,159  

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