West coast RE market...
The big slide
Prime office rents in S.F. are plummeting almost to the level of those in Oakland
Dan Levy, Chronicle Staff Writer
Friday, January 18, 2002
©2002 San Francisco Chronicle
URL: sfgate.com
Office rents in San Francisco are expected to fall this year to the point where prime downtown space will cost the same as it does in Oakland,
where rents traditionally have been much lower.
Both cities are on track to end 2002 with Class A office space priced at about $30 per square foot, according to data released yesterday at a
real estate industry forecast meeting at the Oakland Convention Center.
For building owners in San Francisco's huge, 44 million-square-foot central business district, the bleak market conditions mean they will be
offering rent breaks this year, along with tenant improvements and other incentives -- even as they struggle with current prices that, when
adjusted for inflation, have already sunk to 1985 levels.
"It's going to be a tough year for landlords," Alan Collenette, regional managing director for real estate services firm Grubb & Ellis, told an
audience that included brokers, developers, planners and Mayors Willie Brown and Jerry Brown. "We're back where we were 17 years ago."
And industry experts expect rents to continue to fall for at least another year or so.
The prospect of further erosion in commercial rents in San Francisco comes on the heels of what many real estate professionals say was the
city's worst year in memory.
From the heights of the technology-driven boom in 2000, when only prices in the Manhattan office market equaled or exceeded the $80 Class
A rents that were being charged in San Francisco's Financial District, rents in 2001 fell by half to about $38 per square foot.
Office space in formerly hot San Francisco is now cheaper than space in Boston and Washington, D.C., and only a bit pricier than space in
Seattle. Rents are being driven down by a combination of a lack of demand and the availability of about 11.7 million square feet of vacant
space downtown.
San Francisco's vacant space is about the same as the amount of total office space in Oakland's comparatively small Class A downtown office
market. As a result, experts caution that the convergence of rental rates of the two cities is not the best indication of their relative attractiveness.
"If the two cities are priced the same, you'd think San Francisco has the better amenities," Collenette said, chuckling at the unusual reversal of
fortune. "There's always been a discrepancy in the other direction. At the peak of the market in mid-2000, the rent difference between the two
was $18."
Oakland's Mayor Brown, in his remarks to the crowd, seemed to find a self- interested silver lining in the troubles of his glamorous neighbor.
"The problems of San Francisco are the solution for Oakland," Brown said, suggesting that Bay Area firms -- and San Francisco residents --
might consider relocating their offices to Oakland.
"Oakland is closer to San Francisco than San Francisco is to itself," Brown said, a reference to the supposed advantages of commuting from
Oakland via BART rather than riding a Muni bus from the Richmond or Sunset district to downtown San Francisco.
San Francisco's mayor, instead of addressing the real estate questions of the day, used his time before the brokers to emphasize that he helped
keep the University of California at San Francisco in the city.
"Our first priority was that the University of California research campus was not going to Alameda or Brisbane," Brown said. "Mission Bay will
probably be the most significant development in all of Northern California -- 5 million square feet of spec biotech space, housing, a hospital,
open space. It will be a regional asset."
Experts don't see the regional real estate market, or the general economy, improving for some time.
"We had a boom for three to four years, but because we're so tech-heavy, we're going to lag behind the rest of the country," said Ken Rosen,
an economics professor at the University of California at Berkeley and chairman of the Fisher Center for Real Estate and Urban Economics. "It
won't feel good until the middle of next year."
In addition, Collenette, citing San Francisco's historic pattern of boom- and-bust cycles, said a real estate recovery could begin as soon as
2004 -- although he could not say exactly what industries or economic factors would fuel the rally.
"There's light at the end of the tunnel," he told the crowd of about 1,000 in the convention center's West Hall. "We think that when there is a
turnaround, it will come with unprecedented fury. The cavalry will show up."
REVERSAL OF FORTUNE
-- San Francisco's commercial real estate market is so weak that the city's Class A office rents are rapidly approaching those in Oakland.
Historically, San Francisco's office rents have been significantly higher.
-- San Francisco's office rents, when adjusted for inflation, have dropped to 1985 levels.
-- The glut of office space has created a buyer's market. Tenants can dictate long-term leases at low rents and get landlords to foot the bill for
improvements. . Source: Grubb & Ellis, Rosen Consulting Group
E-mail Dan Levy at danlevy@sfchronicle.com. |
