What Has Happened to Commercial Real Estate Values

I started as a commercial real estate broker in San Francisco in 1984. My first offer I ever made was an office space at 111 Pine Street for $34.00 per square foot. My next offer was for space at 555 California Street for  $52.00 per square foot. The vacancy rate at that time was six percent.  Most buildings were offering paint and carpet allowance with some minor additional tenant improvements. Office buildings did not change ownership all that often back then, but when they did they traded for $150 to $200 per square foot. However in 1984 we were in the middle of an office building boo m  that saw construction prices to build a new office building from the ground up hit $300 to $450.00 a square foot.

With a low vacancy rate, tax advantages favoring development and with lots of money chasing few deals and opportunities, San Francisco was in a major office building boom in the next five years leading to the 1989 earthquake. More than five million square feet of new development was either under construction or on schedule to be built during 1984.

By 1986 the market began to soften. Major companies decided that San Francisco was too expensive as a headquarter city and began moving out. Smaller regional companies began looking at new development opportunities in the East Bay that afforded them cheaper rents while enjoying larger floor plates to house more people on one floor.

By 1989 combined with the earthquake ,  the market crashed. By 1991 the vacancy in San Francisco hit close to 20%, and class A rental rates hit $18 to $20.00 per square foot. Tenant improvements hit $35.00 per square foot and the last of the new office buildings earmarked for the 1980’s had opened representing the last Class A downtown office building that would be built in the next twenty years.

The year 2008 is now here. The average rental rates in downtown office buildings overall stand at $35.00 per square foot. Class A rents are hitting as high as $60 to $90.00 per square foot depending on how high up you are. Most buildings will offer you a paint and carpet allowance with additional minor tenant improvements to be negotiated. Office buildings are trading between $300 and $400 a foot while new construction of new office buildings is hitting $600 to $800 a square foot. Starting at the end of this year over three million new square feet are either scheduled to come online or is in planning.

And so the cycle goes......................................