San Francisco: Epicenter of the Dotcom Demise

San Francisco: Epicenter of the Dotcom Demise Bay Area Developers See Buildings Coming on Line in Period of Plummeting Demand A year ago, every techie with an Internet business plan could raise millions of dollars in a blink and every developer in the San Francisco Bay area rushed to construct or convert space to catch up with the office demand. Then the venture money valve blew out.

The commercial real estate market was left high and dry, as it could not cut off the valve of new office space construction. In the first six months of this year nearly 8 million square feet of leased space came back on the market. That forced San Francisco's vacant office rate up nearly 5 percentage points to where it now stands at 9.1%overall.So far this summer, there has been no indication that let-up in space givebacks are finished.

Add to that the fact that more than 11 million square feet of office space is currently under construction and you're looking at the potential for the vacancy rate to move well into the double-digit figures by year's end. Unlike any other market in the country this year, the tech blowout and rapid buildout of new space has forced a drop in asking rental rates. Rental rates dropped more than 25 cents per square foot on the average in the second quarter of this year. Class A space is seeing the sharpest decline going from an aver- age of $45.66 to $45.33 at the end of second quarter 2001.

The San Francisco office market is the 5th largest market in the country, consisting of 7,773 office buildings with 279 million square feet of space. At the end of second quarter 2001,the San Francisco office market had a vacancy rate of 9.1%,including both direct and sublet vacancy. A year ago the overall vacancy rate was at 4.7%. At the end of second quarter 2001,the San Francisco Southeast area had the highest vacancy rate at 21.3%,while Palo Alto had the lowest vacancy rate at 4.6%.The Downtown Core itself had a vacancy rate of 9.1%with 4.7 million square feet vacant.

At the end of second quarter 2001,total net absorption was a negative 2.83 million square feet.Net absorption at the end of first quarter 2001 was negative 3.25 million square feet, combining for a total negative net absorption of 6.11 million square feet for the year. Over the last 12 months, San Francisco has seen a total net absorption of a negative 1.55 million square feet. At the end of second quarter 2001,the amount of space under construction in the San Francisco office market was 11.56 million. Half of the space is said to be pre-leased. Some of that space, however, is coming back to the market in the form of available sublet space.

The 680 Corridor South market had the most space under construction at the end of second quarter 2001 with 1.69 million square feet.The Downtown Core market was second with 1.04 million square feet under construction. Not surprisingly given the market, investment sales activity is falling with volume down to about 75 percent of what it was a year ago at the same time. At the end of the first quarter 2001 the average sales price/square foot was about $275.This was a decrease from the third quarter 2000 when the average price paid per square foot reached $300.