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2/08/10
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Fallout from the economic recession pushed office availability rates to historic highs in 2009, where they’re likely to remain for some time, according to the San Francisco Studley Report, the national real estate services firm’s analysis of office market conditions in the city and surrounding areas. The overall availability rate (defined as space available for lease whether vacant or currently occupied) equaled 20 percent at year-end, an increase of 3.4 percentage points on an annual basis. The Class A availability rate, 17.6 percent, increased by 2.4 percentage points as compared to last year.
“In order for availability rates to decline materially, the economic recovery must be of a magnitude that generates enough job growth to warrant office expansions and the formation of new start-ups,” said Steve Barker, Studley Executive Vice President and Branch Manager of the firm’s San Francisco office. “Given the ongoing economic uncertainty and businesses’ prevailing focus on cost savings, that scenario seems unlikely to unfold in the near term.”
Opportunities spur some activity
While leasing activity declined 31 percent year-over-year and remains well below the market’s historical average, the fourth quarter saw a modest rebound in square feet leased. On a trailing four-quarter basis (the sum of all leasing activity over the last four quarters), activity improved from 3.9 msf leased as of the third quarter of 2009 to 4.4 msf leased at year end.
“Tenants are cautiously engaging the marketplace—sometimes out of necessity—and are leveraging current market conditions to their advantage,” said Barker. “The most evident advantages are in the form of deeply discounted rental rates and generous concession packages but the available opportunities are even more multi-layered.”
With building values now down by approximately 50 percent from their peak, owners of more than 1,000 commercial properties in San Francisco have requested a reduction in property taxes. “Tenants should be aware that they can benefit from this reduction as well and should negotiate lease terms that allow them to share in the savings,” added Barker. “Moreover, in many cases, tenants should seek to establish 2009 base years, rather than 2010, in order to capture the highest expense base possible and mitigate future escalation pass-throughs.”
Asking rents continue decline
Asking rents have retreated to 2006 figures, with rates in Class A buildings declining at a faster pace than those in lower-quality buildings.
Overall asking rents averaged $28.95 per square foot, down three percent from last quarter and 15.7 percent from last year. Class A asking rents, at $29.89, declined 3.4 percent this quarter and 17.8 percent as compared to one year ago.
Market outlook
Meaningful signs of a market recovery are yet to be seen. Available space will continue to hit the market in 2010 as companies downsize and renew at smaller footprints, adding to the 20 percent of inventory that is already available. Rental rates will continue to soften and tenant leverage in lease negotiations will remain considerable as buildings transition back to lenders or are sold to new owners at a lower cost basis.
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