Looks Like a Typical Leasing Year

Last year was the best year in office leasing since the dot-com boom. But now the office market, like the residential market, is showing signs of leveling off. In 2005, San Francisco witnessed a net absorption of vacant office space of more than 2 million square feet. At the end of the first quarter of 2006, San Francisco had a negative absorption of 125,000 square feet; second quarter figures likely will come out even at best.

Several factors may contribute to this activity, given that the economic climate still appears to be strong.

First, landlords coming off a strong year and anticipating greater-than-normal inflationary rent increases have raised rates on average more than 10% in 2006. This has created sticker shock for some tenants, who may still have time this year to secure a new lease in their price range.

Second, most of the large deals scheduled to be in play in 2006 signed leases in 2005, leaving smaller deals coming off their normal lease cycle to make up this year’s leasing activity.

Third, many businesses are considering consolidating office functions in other cities or using less space to accommodate their office needs. With technological advancements leading to more efficient mobile office connections, businesses may be reevaluating how much space they need per employee.

Finally, with the condo conversation market showing signs of cooling off, it is less likely that large blocks of space will be eliminated from the office market for these types of conversions in the near future.

Should tenants anticipate lower prices? No: With the economy still strong and little new office product planned in the near future, choices will be limited and prices will likely continue to rise after this slight pause in the current market.

Will prices go through the roof as they did during the dot-com days? No, but greater-than-normal inflationary increases will likely continue once this market has adjusted itself.