December 19, 2008

Doesn't Everybody Want To Work Here? (Class A Rents Plunge)

“A new Colliers International report found weighted average rents in the financial district dropped from $56.17 to $41.34 a square foot during the [fourth quarter], a 26.4 percent decline. Across the entire San Francisco market, Class A average rents dropped even more — 28.2 percent from $55.65 to $39.79 a square foot.”

Downtown S.F. office rents plunge by 26% [Business Times]
S.F. office space rent drops 22% [SFGate]
San Francisco Firms Continue To Shed And Sublease Office Space [SocketSite]

First Published: December 19, 2008 8:30 AM

Comments from "Plugged In" Readers

Class A office space is in free fall. I rent our excess office space and we've stopped getting any calls at all. All but one of our tenants have disappeared, with the last one about to give notice. We have space available and no one will even look at it. No one will be hiring next year, and most big firms will be shedding space, and will want out from paying for it, so they will dump it for peanuts.

With no jobs, and people fearful that their jobs will be cut, purchases of homes and condos in SF will continue to decline. Next quarter will be a disaster for SF home prices, and when people lose their jobs, they NEED to sell, so you'll start seeing the stand off that has sales down 70% end in January.

In addition, real estate will get corporate focus, and corporate condos will be dumped on the market as companies look for sources of cash. Already, the corporate condo rental market is a disaster. I saw a one bedroom in the Four Seasons get rented for under $4000, fully furnished with top of the line everything.

Posted by: tipster at December 19, 2008 10:01 AM

perhaps that Class A office space isn't in the real SF.

more serious: the first phase of the downturn is nearing completion (credit crunch). now we are entering the second phase: the damage to the "real" economy

i'm not sure if any sector is safe. They say healthcare is safe, but that's not what I'm seeing on the ground in healthcare. clearly it's more safe than financials...

I'm slightly surprised that Financial district rents are suffering less than non-financial district rents, given the direct impact of the crunch on financial firms...

Posted by: ex SF-er at December 19, 2008 10:13 AM

Obviously it's very important that we start construction on the 1.6 million square feet of commercial space at Transbay, immediately! I will not be satisfied until commercial space is $4/sqft!

Posted by: Jeffrey W. Baker at December 19, 2008 12:23 PM

And you're talking $4/sf per year, right JWB? High rise construction costs have been in the $600 - 800 psf range, right? They will need to deflate big time if anything is ever to get built with rents below $40 psf and dropping.

Morgan Stanley paid over $840 psf for the buildings that Blackstone flipped from Sam Zell. That was really "World Wise" - or more like dumb & dumberer. They got $10B of TARP money. So John Mack is not taking a bonus this year. BFD, he should get a Darwin award. How about clawing back the entire 2007 bonus pool which was about $10B?

Posted by: FSBO at December 19, 2008 1:45 PM

"Doesn't Everybody Want To Work Here?"

No one has ever claimed San Francisco to be overly business friendly.

Posted by: auden at December 19, 2008 4:43 PM

There is a clear trend down for Office space emerging for the next 24 months minumum. The Sub Lease market will overheat in 2009, and qualified tenants will be able to name their price. I remember in 2001, the main drag in Cupertino was a sea of for lease signs. One of my friends was able to lease 40,000 sf of Class A space (think dot com bubble money office) for .05 /ft NNN the first year, .25 / ft NNN the second year and .45 /ft the third year!!!!!!! Basically the owner, one of the biggest land owners in the Bay Area, just wanted someone to take care of their new 40,000 sf facility.

Posted by: Paul Hwang at December 19, 2008 5:07 PM

That's an amazing story regarding Cupertino. The south bay never really recovered from the dot com bust. A huge percentage of the Santa Clara industrial parks around Great America are still vacant to this day.

Posted by: tipster at December 19, 2008 10:41 PM

"Obviously it's very important that we start construction on the 1.6 million square feet of commercial space at Transbay, immediately"

Thank you for the good laugh jwb! Over 2 years ago people were calling me a "hater" for questioning how Transbay Tower would get built. Saying that the tower has "funding" does not work in this economy. There are commercial towers back East that have "funding" that have had construction shut down and are now sitting in the snow with windows boarded up. Get used to the S.F. skyline, because it is going to look this way with only minor changes for the next 8 years.

Posted by: anoncensorious at December 20, 2008 1:00 AM

Paul i find it interesting that you recently vehemently argued that you are not in a position to make predictions about Soma condo prices, even though that's what you specialize in, yet you have no problem making a very bearish prediction on office space.

Posted by: condoshopper at December 20, 2008 3:12 PM

Whether or not they have to convert part of the tower to condos or apartments, the Transbay Tower WILL BE BUILT.

Posted by: sf at December 21, 2008 4:49 PM

We probably have to be more specific about what we mean when we refer to "the Transbay Tower". I predict the building will be scaled down significantly, delayed two years, and any issue with the funding will be resolved by spending high-speed rail bond money. Yes, I think something will get built, but I'm hardly confident in the current design.

Posted by: amused_in_soma at December 21, 2008 5:50 PM

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