Tough times repress [Silicon Valley] commercial real estate
Posted at 10:03 p.m. PST Sunday, Jan. 27, 2002
BY DAVID A. SYLVESTER
Mercury News
Just as Silicon Valley is starting to recover from its economic earthquake, the aftershocks are still rumbling through one of its biggest and most important businesses: commercial real estate.
A number of leading real estate firms are releasing their forecasts for this year, and all point to tough times ahead. The consensus says that rents will continue to fall and the amount of vacant space will grow this year. At the peak, more than 50 million square feet of office, industrial and research space could stand idle in the Bay Area, waiting for the next big boom.
``It's going to be a bleak year,'' agrees Ken Rosen, chairman of the Fisher Center for Real Estate at UC-Berkeley's Haas School of Business.
Or, as Philip Mahoney, executive vice president at Cornish & Carey Commercial, puts it: `` '02 is going to be rough.''
The squeeze on commercial real estate is one of the last major repercussions of the 2000 tech bubble. Just as commercial rents soared and vacancies plunged to historic lows during the bubble, the real estate market is suffering the brunt of the decline. An analogy would be that the flash of fireworks is seen long before the sound is heard, because sound travels more slowly than light.
In this case, the flash of the bubble popping has preceded the sound of the commercial real estate crunch by about a year.
``Silicon Valley goes through some pretty vicious cycles in both its economy and its commercial real estate market,'' said Mark Zandi, chief economist at Economy.com, a West Chester, Pa., regional consulting firm.
In 2001, the average rent asked for office and research space fell 58 percent from the previous year, from $4.83 a square foot to $2.02 a square foot, according to data from Joint Venture: Silicon Valley Network based on a survey by BT Commercial. Still, this remains above the average rent of $1.66 a square foot asked in 1999.
Similarly, vacancies have zoomed from 3.5 percent in 2000 to 16.2 percent last year, the survey showed.
But this slump appears less serious than the previous one in 1990-91, when developers built too much space and lenders were stuck with problem loans. This time, the market faces a sudden drop in demand, not excess supply, and much of the vacant space is held by companies that already have signed leases, not by landlords.
As a result, the squeeze in commercial real estate isn't expected to radiate out to the lenders and cause a wider credit crunch.
Ironically, the continued real estate problems are coming just as many economists are now optimistic about an overall recovery. Mario Belotti, a professor of economics at Santa Clara University, gave his annual forecast Friday and announced: ``The recession is over.''
One key economic forecaster, the Economic Cycle Research Institute, announced a week ago that the recovery was ``imminent.'' The institute's announcement is particularly significant because it was virtually alone in accurately predicting a recession last year when most economists were expecting strong growth. It warned that a recession was ``unavoidable'' last March, the exact month that the recession officially began.
``The pain is not over just yet,'' warned Lakshman Achuthan, managing director of the institute. ``There's very little evidence to suggest the recovery is robust.''
Still, some recovery is better than the sharp decline that has hit Silicon Valley hard since fall 2000. It just hasn't yet translated into a demand for new space in commercial buildings throughout much of Silicon Valley.
The favorite measurement of health in commercial real estate is what's called net new absorption, or the change in how much of the current stock of commercial real estate is being rented. Cornish & Carey Commercial's annual forecast expects more of the current space to wind up on the market this year, meaning absorption will remain negative. It won't be until next year that companies' demand for space soaks up any more of the current supply and absorption turns positive.
Nearly every area of Santa Clara County will experience this problem of more space going on the market. The exception may be Sunnyvale and Mountain View, which may see a slight rebound in the use of research and development space this year, the forecast said.
The biggest problems remain in San Francisco, which Zandi called the worst commercial real estate market in the nation, because the dot-com bust left so many buildings vacant.
And one bright spot is downtown San Jose, where vacancies are running at half the rate of the rest of the valley. Mark Ritchie, of Ritchie Commercial, estimates only 12.6 percent of the space in downtown is vacant. Rents are stabilizing between $3.25 and $3.50 a square foot for top-of-the-line buildings built within the past 20 years and $2.25 to $2.50 for older buildings.
``I was feeling blue in December, and now I'm more optimistic,'' he said.
Contact David A. Sylvester at dsylvester@sjmercury.com or (408) 920-5019.
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