Overview
of the Bay Area Office Market
1991
to 2001
Senior Vice President
Colliers International
1850 Mt. Diablo Blvd., Suite 200,
Walnut Creek, CA 94596
Tel. 925.279.5590 Fax.
925.279.0450
jweil@colliersparrish.com
During the mid-1980’s developers constructed tens of
millions square feet of new office projects, fueled by over-abundant lending
practices, overly optimistic office absorption predictions, and development
companies requiring new projects to sustain their organizational structure.
Until 1986 tax laws allowed for significant tax deductions even if the
office projects were unleased, and once these laws were changed the entire
commercial real estate collapsed. In
the Bay Area as well as throughout the United States we experienced an
eight-year office market slump, with a number of sub-regions (such as
Pleasanton) reporting 20-35% vacancy rates.
Suburban Class A office product which was proformaed to achieve $24-30/sq.ft.
(per annum, fully-serviced) were leased, turn-key, at $12/sq.ft. flat for five
years (no base year rental increases). San
Francisco financial district rents were $18-25/sq.ft. during these difficult
times.
In the mid-1990’s the Bay Area office market stabilized,
and rents began moderately increasing. The
‘dot-com’ phenomena struck the Bay Area in about 1998, reaching a frenzied
peak during 2000. During this
three-year time period in several submarkets office rents doubled and in some
cases tripled. There were bidding
wars with eight or ten tenants bidding on a single 50,000 square feet block of
space, offering stock warrants in new companies as landlord inducements.
Rental rates in San Mateo County went from $30 to $78/sq.ft., rents South
of Market rose from $25 to $65/sq.ft., and prime San Francisco financial
district rents soared from $35 to as high as $115/sq.ft. (reported in December
2000). Office developers responded
by converting millions of square feet of warehouse space to office space in San
Francisco’s South of Market, and new office construction in San Mateo,
Emeryville, Pleasanton, Dublin, and San Ramon added tens of millions of square
feet of new office buildings. Additionally,
major companies commenced campus office park construction for their own
facilities throughout the Bay Area, again adding tens of millions square feet of
new space during just the past five years.
Major companies in high-tech industries such as Cisco,
which alone leased or committed to buying over 8,000,000 square feet of new
office product during Y2000 alone, along with the hundreds of new startups that
suddenly found themselves awash in cash after venture capitalists raised $10 or
50 million dollar rounds with instructions to grow their businesses as rapidly
as possible combined to fuel this office absorption frenzy.
The NASDAQ crash of Spring 2000 and further stock value
deterioration in December 2000 put the brakes on Bay Area office leasing.
This sudden market correction, never before seen in our industry since
the great depression, caused rents to plummet almost overnight with millions of
square feet available with in the first two months of Y2001, due to the shut
down of hundreds of dotcoms. High-tech
and other industry layoffs throughout Spring and into Summer 2001 has continued
this downward trend with business giants like Charles Schwab offering 500,000
sq.ft. of sublease space, Bank of America, Intel, Cisco, IBM, ENRON, and other
joining in the downsizing of Corporate America.
Are rental rates in East Bay regions dependent on rates in
Silicon Valley or San Francisco? What
are the drivers behind subregion trends and how far down will our Bay Area
office market go before it stabilizes?
The answers to these questions are more complicated than
just a cause and effect relationship between subregions or industries.
As an example, Emeryville has been greatly affected by the demise of the
San Francisco office market as it was ‘lower-cost’ alternatives to dotcom
and e-commerce firms seeking expansion office space.
As a result, vacancy rates are currently in the 30-35% range and rents
have dropped 30-40%. Next door in
Oakland, which had minimal dotcom leasing, Class B rents have softened but Class
A rents have remained relatively stable, and there have only been a few larger
blocks of space made available by downsizing companies.
Downtown Walnut Creek, which for most of the mid and late
1990’s hovered at $28/sq. ft. rose to $51/sq. ft. in late 2000 and is now at
$42-48/sq.ft. due to minimal new construction and almost no dotcom leasing/unleasing.
Pleasanton experienced office rents go from $29/sq. ft. to $48/sf in a
twelve-month time-span and now with office vacancies rising from 1% as of
late-2000 to an estimated 7% today (including sublease space) rates have dropped
slightly to $42/sq. ft.
When will we reach bottom?
Expert opinions vary, but as long as layoffs are reported on an
almost-daily basis office vacancies will continue to increase.
There is also a lag time between when a company announces a downsize,
gives employees termination notice, and finally places the facility on the
market for disposition. There may also be a lag time for rehiring, as once a
Cisco-type makes the painful decision to terminate employees it went to great
expense to hire, equip with office space, train, and bring into the company
culture even several quarters of positive NASDAQ economic news may not be enough
to cause massive amounts of rehiring.