High Vacancy, Low Rents
Plague Bay Area Market
SAN FRANCISCO -- Buffeted by the tech downturn and other business contraction, the office market here posted a record-high vacancy rate in the first quarter, pushing rents further downward.
For the first time, San Francisco's office-vacancy rate hit 21%, according to a report by Grubb & Ellis Co., a New York real-estate services firm. The latest vacancy rate compares with 19% the previous quarter and is a big jump from the 8% vacancy rate of a year ago. Before the recent surge, the high was 17% in 1987, when the market had eight million square feet less than today's 62.6 million square feet.
The vacancies helped push average rents down 11% in the latest quarter, to $33.53 a square foot at top-tier properties -- or about $28.65 a square foot overall -- from $37.71 for top-tier properties in the previous quarter. That is a sharp drop from $66.08 at top properties a year ago.
As the center of the once-thriving dot-com industry, San Francisco's rents soared and its office vacancies plummeted. Now, as that industry -- and those that boomed with it -- have scaled back, the city is feeling the flip side of those outsized moves.
More vacancies and lower rents are expected this year, says Colin Yasukochi, research director in the San Francisco office of Grubb & Ellis. He estimates the two million square feet of new office space in the construction pipeline will be "the biggest contributor to vacancy" this year, adding to the 13 million square feet of office space available in the city -- more than a 10-year supply based on typical net absorption of space. Generally, most of the new office buildings under construction here have been preleased entirely or in part, meaning tenants are still on the hook for that space.
Indeed, that is what is happening at Foundry Square, a 1.1-million square foot, four-building office complex in San Francisco being built by a joint venture that includes Equity Office Properties Trust Inc.
In its annual report filed the week of April 1, Equity Office, a Chicago real-estate investment trust, said that a company that had preleased a 327,000 square-foot building at Foundry Square, still unbuilt, paid $85 million to break the lease. Sun Microsystems Inc., a Santa Clara, Calif., software maker that preleased nearly 534,000 square feet in two buildings at Foundry Square, paid that termination fee, say real-estate people familiar with the situation. A Sun spokeswoman said the company had terminated a portion of its lease, but she declined to elaborate.
Meantime, J.P. Morgan Chase has put up for sublease 272,000 square feet of a new 665,000 square-foot office building that it leased from Houston developer Hines Interests LP, according to a real-estate broker working with J.P. Morgan Chase. The broker said the New York banking firm intended to sublease part of the building, although the amount has increased.
Of course, bad news for landlords is good news for companies seeking space. "From week to week, prices seemed to drop," says Craig Donato, chief executive of Grand Central Communications Inc., a start-up has been looking for new digs to replace its current space. The company is close to signing a five-year lease deal for 18,000 square feet of space where its rent will be cut by "more than 50%," Mr. Donato said.
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