San Francisco Business Times
By J.K. Dineen
November 13th, 2009

A nascent recovery in San Francisco’s leasing market could be swamped by a wave of empty office space hitting the market in the next two years.

Consolidations by several large tenants — including Wells Fargo, Levi Strauss, Charles Schwab, Williams Sonoma and JP Morgan Chase - will result in the return of nearly 1 million square feet to the office market during the course of 2010, according to a forecast by Colliers International.

Wells Fargo will vacate 350,000 square feet at 155 Fifth St. in June 2010. In opting to renew at Levi’s Plaza at 1255 Battery St., Levi Strauss will shed about 200,000 square feet of its current 550,000-square-foot headquarters. William-Sonoma’s consolidation into the Icehouse on Union Street will result in about 75,000 square feet of vacant space at Mariposa Square on Florida Street and Wamu Card Services, now JP Morgan Chase, will give back about 105,000 square feet at 123 Mission St., according to Colliers.

A steady stream of smaller tenants is also contracting.

“We are seeing a significant number of smaller tenants under 10,000 square feet giving back space as a result of companies merging, downsizing and dissolving,” said Jim Sobel, a Colliers senior vice president who represents landlords.

The impending space dump is a dark cloud hanging over the leasing market, which has recently seen an improvement. After a lengthy stretch without major deals, Del Monte, Cisco, Twitter, Nektar and others have grabbed half a million square feet in the last month.

And 2011 looks just as bad for landlords in terms of tenant contraction, according to the tenant brokerage Studley. In 2011, when 2.7 million square feet is up for expirations, Studley estimates that large tenants will downsize by 1 million square feet.

“Our data is showing a projected 2 million square feet of negative absorption through 2011 and I have not seen anything pointing towards positive job growth, so we still have some room to the bottom,” said Studley Corporate Managing Director Matthew Hart.

Financial services drives trend

Much of the downsizing will likely be led by financial services firms and has its roots in the bailouts, bankruptcies and government-orchestrated mergers of the financial crisis. The bankrupt Lehman Brothers has 21,000 square feet on the 30th floor at 555 California St. expiring next year. Bank of America leases 300,000 square feet at the Transamerica Pyramid with some 50,000 that the bank can terminate at the end of 2010. The BofA acquisition of Merrill Lynch last year creates other opportunities for contraction, as Merrill Lynch has 150,000 square feet at 101 California St. set to expire in 2011.

Large financial institutions are still sitting on unneeded space across the country, said CB Richard Ellis’ Global Chief Economist Raymond Torto.

“If you went into a lot of these spaces right now you’d find a lot of Swiss cheese,” said Torto. “As their leases expire, these guys are going to take that Swiss cheese and pull it together.”

Tenants taking more space than they previously had is an “exception” today, according to Jones Lang LaSalle Managing Director Greg Fogg, who represented Levi Strauss in its renewal on Battery Street.

“What we hope for today is stability, the status quo. That is a company that is actually doing well today,” said Fogg. “What most companies are looking for is a way to get more efficient, which is a euphemism for cutting back.”

New economy vs. old

With all the looming expirations in the central business district, brokers find themselves pinning hopes on the sectors that have driven growth over the last few years: technology and biotechnology. Social gaming company Zynga has a requirement for about 140,000 square feet and may still end up at 500 Terry Francois Blvd., although that deal is on hold after the lender was taken over and sold by banking regulators. The unstoppable Salesforce is currently out with a requirement for upwards of 260,000 square feet. Veteran Cushman & Wakefield landlord broker Richard Robinson, part of a team leasing the Transamerica Pyramid building, said San Francisco’s real estate community still tends to focus on the central business district, rather than growth areas like Mission Bay or SoMa.

“The old guard views San Francisco as having a weakening core because the old-name institutions are being consolidated,” said Robinson. “We all lament the days when we had the mainstays like Chevron, but I don’t know if enough credit is being given to the new names that are popping up here. My guess is that a lot of people don’t know what Salesforce does — it could be as strong or stronger than the mainstays.”

Colliers is currently monitoring nearly 60 tenants with over 2 million square feet of office lease requirements for 2010. If these 60 tenants were to fulfill their stated space needs (some are growing and some are downsizing), it would equate to a net growth of 648,000 square feet for vacant space.

“There are also numerous tenants from outside of San Francisco that are currently quietly touring the market, which could easily offset most of the negative growth projected for 2010,” said Scott Harper, director of Colliers’ regional specialization team Urban Landlord Partners. “Mission Bay, in particular, has received a lot of interest from tenants outside of San Francisco.”

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Tom Poser, Jones Lang LaSalle, San Francisco
www.sanfranciscotenantrep.com

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