June 12, 2009
JustQuotes: It's A Good Time To Be A New Tenant In San Francisco
"Tenant-starved San Francisco office landlords are laying on the concessions. A new report from the tenant brokerage Studley shows property owners are now shelling out an average of $45 per square foot in concessions to tenants willing to ink a long-term deal. The amount of free rent owners are doling out has jumped to seven months, while tenant improvement allowances are now averaging $50 a square foot. Studley says asking rents are down 30 to 50 percent in many buildings and tenant demand is off 40 percent. Average Class A asking rent is $34.74 a square foot, down 25.3 percent from last year..."
∙ S.F. landlords entice tenants with concessions [San Francisco Business Times]
First Published: June 12, 2009 9:00 AM
Comments from "Plugged In" Readers
first example is in Concord... i hate the term "real sf" but in this case it's appropriate. the rest of the article requires a paid subsciption so i have no idea if "san francisco" actually means "bay area"
[Editor's Note: The "first example" you cite is actually from another story in the column. The full text of the concessions piece is as above.]
Posted by: hangemhi at June 12, 2009 10:13 AM
actually, I too only get the first part, the rest for paid subscribers. (I clicked both links).
first of all, a positive note:
lower Office Rental rates means a more competitive San Francisco.
this will allow other startups and other firms to get on the road to prosperity. it will leave firms more wiggle room to pay their employees...
from a macro point this story is important of course because lower office rental rates affect office sales prices. And there are a LOT of nasty Commercial Real Estate securities that depend on CRE appreciating. it's one of the many next shoes to drop for the banking industry.
I wonder what will happen if (when) one of the un-TARPified banks has to go back to mama govt when their CRE portfolio explodes?
I'm sure it will all be "who could have possibly foreseen this?" and "well we WERE fine... just look at the bogus stress tests!"
that said, a lot of the weakness in CRE is due to the implosion of the financial houses. the billion dollar question is whether or not there are other firms who can step in to take up the slack, as it's unlikely that many of those financial firms are going to roar back to their former glory any time soon.
Posted by: ex SF-er at June 12, 2009 10:41 AM
The office building where another businessman friend of mine rents space was refinanced last year for a staggering sum. The owners took the cash out. Rents weren't even 75% of the debt service last year.
This year, rents have fallen like a rock. So the owner is basically looking at rents that are 50% of the debt service with no chance of ever breaking even. Most commercial financings use a 30 year amortization schedule, but the loan itself has a balloon payment in year 5 or 10. When that loan is up, the owners are going to have to bring more cash to pay off the existing loan (in addition to what they'll get from a new loan) than the building is worth, and they are losing money on it every month.
The remodeling project in the building has abruptly stopped part way and decorative items that break or get vandalized are now being left as is.
When my friend's is up, he'll be out of there so fast the owner's heads will spin. I figure it's only a matter of time before the building goes back to the bank and gets sold for 50% of the debt from last year. It's a small local bank who, until last year, known for aggressively refinancing commercial buildings. They're gonna get killed.
Kudos to the owners of the building my friend rents. They timed it right and essentially "sold" the building to the bank for an unreal amount of money.
So, although rents are falling, the owners of the real estate (or the banks), are really taking it on the chin. I don't relish the next lease renewal negotiation I'm going to have with my commercial landlord. I'm sure he's hurting just as much as anyone.
Posted by: tipster at June 12, 2009 11:11 AM
on the bright side for tennants and their employees (read: me) -- our current lease is up soon and my employer should no longer be looking at moving my branch to Sacramento for cost savings
Posted by: Rubicon at June 12, 2009 11:19 AM
Well, Rubicon, you still have the payroll taxes to deal with. Really, SF needs to do a better job of attracting and keeping high paying jobs. Not just a sprinkling of start ups and boutique firms awash in a sea of nail salons, baristas, and life-coaches.
Posted by: Robert at June 13, 2009 12:53 AM
^^It is pretty sad.^^ San Francisco is to me a city based more on a Monte Carlo economic model. I cannot remember if it was Forbes or the Wall Street Journal, but there was an article about this city being the Trustafarian capitol of the USA. Basically the article went on to say that the wealth of San Francisco is brought by individuals who are "ready to slow down" and live in this city, instead of where they made the money or inherited the money. Basically we have a segment of the population that is very rich, and a huge amount of underpaid people providing them with services. (Who are all those hipsters sitting in cafes in the middle of the day you wonder? They have Grandpa's money from the detergent factory in Ohio, or Daddy's money that was made in owning a fast food chain in Arizona)
Posted by: anonwithoutfamilytrust at June 13, 2009 5:32 AM
indeed, and they all kill the HHI numbers everyone here uses to "prove" how far down home prices must come. with suburbanites returning to the city, empty nesters moving in, a large group of 1st time home buyers who have been saving money for 5-10-15 years of earning high incomes while renting.... the floor to the "prime" SF market will be much higher percentage wise then outlying areas. everyone moved outward as they got priced out, now they are moving inward when they can
Posted by: hangemhi at June 13, 2009 10:47 AM
"a large group of 1st time home buyers who have been saving money for 5-10-15 years of earning high incomes while renting...."
That's me. 1st time home buyer. Spent the last 10 years going from zero to 2x income saved. Top 10% of HHI for SF city.
But don't look to me to save SF prices. I'm more likely to head out to Livermore and spend 1x income on a place than mortgage myself to the hilt to buy a POS in SF, which is all I can afford under the 3x income rule or even if I stretch to 4x income.
Posted by: diemos at June 13, 2009 11:18 AM
Well, hangemhi, I'm not able to make sense of your comment. Perhaps you think only W-2 income contributes to HHI? Income from estates, from stock sales, from sales of options, from government benefits and retirement benefits -- all of this is included in household income. Anyways, it doesn't matter.
The HHI that matters for a high renter city is that of actual homeowners, and more accurately, recent homeowners. If what you believe is true, then recent owners would constantly have higher incomes, as they come into the city and push prices up. Indeed, this happened briefly in 2005, but that trend has since reversed itself. Alas recent owners are now only making about 120K. These same people "believe" that their own house is worth 850K, on median, or a multiple of 7. Of course, 850K is not the median in sales, which is much lower, it's more a belief of recent homeowners about the value of their own property.
People are in way over their heads. Over time, they stop being able to devote 50%+ of their incomes to debt service. Now, it may well be the case that a new pool of even wealthier buyers steps in, and pays what the present stretched owners are expecting -- the greater fool theory. For a multiple of 4, the newcomers would need to have a median income of about 212K, or about 80% more than the actual incomes of the present owners. Now, I can understand why you would want that to happen, but not necessarily why you believe it will.
Posted by: Robert at June 13, 2009 11:33 AM
well, robert, your analysis is overlooking a couple of elements. namely, that some recent buyers had prior assets in lieu of HHI. real estate or private equity in small co's come to mind. additionally, alot of existing SF RE wealth gets passed down, and those folks should also be 'set.' so yes, there certainly are some stretched HI folks, but there is not an insignificant percent that had prior assets/assistance from family. i also think this phenomenon is more pronounced in an established, old moneyed destination city like SF. others, of course, are free to buy in inspiring exburbs such as livermore.
Posted by: 45yo hipster at June 13, 2009 10:50 PM