Silicon Valley Office vacancy climbs to 19%
bayarea.com
Posted on Tue, May. 07, 2002
Office vacancy climbs to 19%
By K. Oanh Ha
Mercury News
Bay Area commercial real estate has continued to nose-dive this year, logging the highest office vacancy rates in more than a decade and causing rents to slide steeply.
The overall office vacancy rate reached 19 percent in the first quarter of 2002 -- higher than during the 1990-91 recession, according to a report by BT Commercial Real Estate.
That compares with a vacancy rate of 16.6 percent in the fourth quarter of 2001 and 7.6 percent rate in the first quarter of 2001.
Certain areas have been harder hit than others. More than a quarter of the office space in San Mateo County -- 26.4 percent -- is empty. San Francisco, with its decimated South of Market area, had a first-quarter vacancy rate of 19.8 percent.
``We've seen the bottom of the economy,'' said BT Commercial managing partner Drew Arvay. ``What I'm not sure about is whether we've seen the full purge of real estate.''
Businesses have been shedding office buildings, as well as employees, to cut costs in the downturn. Forty percent of the vacant office space in the Bay Area is being offered for sublease by companies that no longer need it, said Arvay.
There is nearly 40 million square feet of vacant office space in the Bay Area, according to the BT Commercial report that looked at Santa Clara, San Mateo and San Francisco counties and parts of the East Bay.
In Santa Clara County, a little more than 10 million square feet of offices are empty -- the rough equivalent of all the office space in Palo Alto.
``It's not going to get good for a while,'' said Philip Mahoney, executive vice president at Cornish & Carey Commercial. ``The pool of tenants to take space is increasingly getting dry.''
There's also 726 football fields, or 26 million square feet, of vacant research and development space in Santa Clara County alone, according to BT Commercial. The warehouse vacancy rate in all of the Bay Area was 8.9 percent for the first quarter, up from 3.3 percent one year ago.
With more offices available than ever before, rents continue to fall.
Average office rents dropped 45 percent in the first quarter compared with the same quarter of last year, according to a survey by broker Grubb & Ellis. The average monthly asking price for office space was $2.53 a square foot, compared with $4.56 a year ago.
That represents the largest percentage decline in at least a decade, said Colin Yasukochi, Grubb & Ellis director of research in San Francisco. The drop is so sharp because the scramble for office space during the tech boom drove up rent prices way beyond normal levels.
BT Commercial found that in San Mateo County, the average rent has dropped nearly 60 percent, to $2.95 a square foot, since the height of the tech economy in 2000. Santa Clara County has seen office rents fall 54 percent since 2000, to $3.03 a square foot.
Although the overall economy seems to be rebounding, some commercial real estate experts don't expect the market to recover until as far out as 2004. The ripples from the tech bust are still hitting commercial real estate, many said. It won't be until the overall market is in its second year of growth that commercial real estate will regain its balance, predicted Arvay.
It all comes down to demand, which is spurred by employment growth, said Arvay and others. In the Bay Area, commercial real estate is closely pegged to venture capitalists, who invest money in new companies which then hire and rent space. ``We're going to chug along here for a while until the venture capital community starts to put in more money,'' said Mahoney of Cornish & Carey.
Real estate operates on a boom-and-bust cycle, and brokers agreed it's only a matter of time before the market turns around.
``There's still a great deal of confidence in the Bay Area,'' said Yasukochi. ``It's a strong economic engine in the long term. It's not going to be a quick turnaround -- but it will turn around.'' |
