April 10th, 2009
S.F. office rents drop 24%, sublease & direct space in competition
The San Francisco Chronicle reported this week that office rents have dropped in our great City 24% over a years time. This number is not surprising of course as we have seen a dramatic uptick in sublease space coming to the market, and some of that new sublease space is just that, brand new space.
In a traditional sublease scenario the current tenant (sublessor) is leaving space behind that may be old and dated, it may have a shorter term on it, or the sublessor may be in financial trouble and unable to offer tenant improvement dollars. In today’s market however there are plenty of financially viable tenants putting excess, newly built out space on the market. This newly built space with term left on the existing lease, despite being a sublease, can look and feel like a direct lease with the landlord.
What this does is undercut the landlords leasing efforts on their direct space because now the direct and sublease spaces are comparable. To a tenant seeking a new location there is no difference potentially between the two opportunities in the same building, thus leading to the landlord having to drop their asking rate dramatically to compete with the sublease asking rate. It also forces
those sublessors with old and dated space to drop their asking rates even further than they would like, to get their pricing underneath newly built out sublease opportunities.
This trend continues to grow, and as we see more leases and sublease occur it is likely the rates will drop even further in the short term.
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S.F.’s office rents drop 24% in year
San Francisco office rents tumbled nearly 24 percent from a year ago, the biggest decline since the dot-com bust in 2001, as shrinking and shuttering companies vacated hundreds of thousands of square feet.
Weighted rents for Class A space throughout the city dropped to $38.80 a square foot, down from $50.92 a year ago, according to a preliminary report from commercial brokerage firm Colliers International. The office vacancy rate rose to 13.2 percent from 12.6 percent in the previous quarter and up from 10.2 percent a year earlier.
“It’s tough to lease right now even if you’ve dropped the rent,” Alan Billingsley, an analyst for Deutsche Bank AG’s RREEF Research, told Bloomberg News. “We think the market won’t bottom until 2010.”
Local companies dumped 553,825 square feet of office space on the market in the first quarter, according to Colliers. The largest contributor was public utility Pacific Gas and Electric Co., which vacated 80,000 square feet at 123 Mission St. as it consolidated into two other locations in the city.
Vacancies will likely tick up further in the second quarter as San Francisco brokerage Charles Schwab Corp. and department store chain Macy’s collectively abandon more than 500,000 square feet of space in the city.
Almost half of the largest companies in the region plan to cut staff in the next six months, said John Grubb, spokesman for the Bay Area Council, which represents the region’s biggest employers. About 279,000 people in the Bay Area are looking for work, almost double the number from a year ago, Grubb said.
Commercial property purchases in San Francisco were “nearly nonexistent” as surging defaults and reduced availability of debt curtailed acquisitions, according to Colliers.
San Francisco’s first-quarter rent decline, the biggest since a 49 percent drop in the fourth quarter of 2001, followed a 22 percent decrease in the fourth quarter, Colliers said.
Written by Chronicle Staff and News Services, April 9th, 2009.
San Francisco Office Rents Decline 24% (Chronicle)
Picture Courtesy of Mike Humbert
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If there is anything I can do to help you as a Tenant Representative in the commercial real estate world, please do not hesitate to get in touch with me.
Thanks for visiting,
Tom Poser, Jones Lang LaSalle, San Francisco
www.sanfranciscotenantrep.com
