Starboard Commercial Real Estate

Hans Hansson | June 18, 2007

In over twenty years of being an office leasing broker in San Francisco, I have never witnessed such a price variance between similar buildings. Today's comparable class "A" office buildings that were once a dollar or two apart in price can be as much as $15-$20.00 a square foot apart.

We visited eight buildings of similar quality in a recent tour with a law firm. These buildings have not changed significantly in the last twenty years yet prices ranges were from a low of $36.00 dollars to a high of $66.00 per square foot. The only major difference was that the lower priced buildings had long-term owners and the higher priced buildings had new owners.

The reason why is the new owners bought their buildings, in most cases, with a low vacancy rate of less than 5 percent. In the financing world a building with 95 percent occupancy rate is considered fully leased. Therefore, within a portfolio of assets these purchases are looking for future higher rents based upon future vacancy that does not exist on their books. As a result any deal that can be done higher than their last market rate deal can create millions of dollars in new value to their asset because the last deal done will set the rental rate value for the entire building.

The reason owners can make this strategy work is that these new owners are quickly consolidating the office market to just a few players thereby becoming the market players and controlling prices as a result.

What may reverse this trend could be the latest vacancy rates that have stalled at seven percent for most of the second quarter. Anticipated further reductions in the overall vacancy rate is not happening and therefore may put pressure as more units in each of these buildings becomes available to begin lower prices to compete.

One building property manager pushing prices to the high fifties with some very nice "spec suites" available indicated that tours were way down and had not seen any offers in months. This kind of news could be welcoming to tenants entering the market in the next year.
Posted 12 years, 4 months ago on June 18, 2007
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Comments on this post:

Re: Why Major Price Differences Between Similar Buildings
Interesting observation about the office market there. My company is a merchant developer of small office buildings for sale in Orange County, CA. We are actually seeing an office market that is still tight, even with an uptick in the vacancy rate and close to 2MM sf of new office space coming on line in the next 12 months. These new buildings are also demanding the highest psf rental rates in the market place to date. So for our business it is great as we offer companies the opportunity to own a building to house their business vs. paying rent in a high rise.

2007/06/21 by Steve Beckett • • Reply
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Re: Why Major Price Differences Between Similar Buildings
I think we could use a company like yours on the east coast. I'm about 45 minutes west of Boston in Massachusetts and the requirements I see daily are small businesses that no longer want to lease and want an equity position. These businesses are looking for anywhere from 1,500 - 10,000 SF buildings that just don't exist. Office condos are starting to pop up which is a great alternative to the rising lease rates.

I've also seen the trend that Hans speaks of with new landlords basically setting new standards for lease rates although the hot market out here is retail as opposed to office space. Rates have gone up 20-25% over the last few years and every time CVS or Walgreen's or some big box retailer comes into the market, the rates go up again...

Let me know if you decide you want an east coast presence...

Good luck!

2007/07/13 by Rob Beland wwwReply
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