Starboard Commercial Real Estate

Hans Hansson | December 5, 2006

With reports that San Francisco's office vacancy rate has fallen to 10.5%, tenants and brokers are concerned that there may not be enough space to keep office rental costs in line for company budgets as well as to address needs for expanding and start-up firms. On the other hand, landlords see a potential windfall as rental rates continue to rise. For larger building owners, even a rental rate increase of $1 per square foot can have a major positive impact on income.

As a result, new owners are entering our marketplace. Deacon Partners, out of Boston, and Swig Companies have quickly become major San Francisco players, buying office buildings in the core downtown to control market share. These purchases are driven by the belief that San Francisco has limited expansion options for office buildings, and therefore rents will have to rise.

However, San Francisco has been here before. In the late 1970s and again in the late 1990s, office vacancies hit the low single digits. In both cases, the attendant rise in rental rates led to firms moving out of the city or going out of business altogether (the dot-com crash).

The San Francisco Bay Area has been a secondary office market for major companies and a start-up market for local tech firms. It is not a strong "headquarters" marketplace. As a result, office rents have more impact on the bottom line of local firms than on larger corporate firms. A rapid decrease in vacancy could lead to an immediate crash in the office market because businesses simply could not afford to do business here.

Historically, the magic number that satisfies everyone is a 9% vacancy factor. At that level, landlords see a future in terms of increased value of their asset, while also being aware that the market is strong but not without weaknesses. Tenants realize that there are limited choices at 9% but there are choices, and they make quick decisions in evaluating these options and leasing space. Brokers are needed to serve both landlords and tenants, making 9% a win-win situation for both the commercial real estate industry and the economic stability of our marketplace.
Posted 12 years, 11 months ago on December 5, 2006
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