According to Colliers International, 2,721,080 square feet of commercial sublease space is currently on the market in San Francisco (49% of which is currently vacant), up a net 266,000 square feet over the past 30 days.
∙ San Francisco’s Commercial Sublease Snapshot: August 2009 [SocketSite]
Ouch, those jobs really aren’t coming back! I own a small corner building (footprint approx. 900 sq ft) in the Financial District bordering Chinatown and it has been brutal trying to find a tenant to fill the retail space. Office tenants are non-exisitent.
No, the jobs aren’t coming back. Further, many buildings which formerly provided jobs have been converted to economy-killing condo-lofts. Commercial rates are dropping for offices and retail, But these buildings are of the wrong type to provide the production/distribution/repair jobs which are the basis of any sustainable urban economy. The lofts in the eastern neighborhoods represent thousands of lost jobs. Way to go for the brass ring, San Francisco: YOU LOSE!
Live Smart, have you considered lowering your rates in monthly increments until you find the market-clearing price? Even in a depression, anything can be sold for the right price.
I have an idea that might breathe life into our local economy:
Legalize prostitution and certain psychotropic substances. SF will become the new Amsterdam by the bay.
I walk down Kearny from Market to Washington every day on my way to work, which is the area of Live Smart’s building. I seems that every week there is a newly vacated storefront.
I agree the jobs aren’t coming back. SF as a job center will be less so 10 and 20 years from now.
It makes these grandiose plans for rentals and high-rise condos especially SOMA look foolish. Like who is going to occupy the space?
Some of the upscale market will be filled by wealthy individuals as second homes – those folks who come to SF several times a year to “play”.
two beers: I have made pretty steep reductions in rent. My prior tenant was paying $4,200 a month two years ago and my asking now is $3,500 a month. I don’t think I can go lower with 3 to 5 year long lease especially with scary inflation looming.
one-eyed man: You definitely walk past my building since my building is on the corner of Kearny and Sacramento. My other retail tenant is Latte Express (a mom and pop bakery and coffee shop.)
My only hope is that business and tenants will pick up with the new City College campus on Kearny and Washington to be completed by Spring 2011.
I agree the jobs aren’t coming back. SF as a job center will be less so 10 and 20 years from now.
I would distinguish between jobs and income. SF is still a net jobs exporter, meaning that more people commute into the city to work here than commute out of the city to work elsewhere. We have about 100,000 more jobs locally than the size of our labor force (although that’s an informed SWAG).
The problem is that cost of living is still too high, and those jobs don’t pay enough to allow people to live here, at least in comparison to what they can get in Daly City or Oakland. So while I agree that the income bubble is deflating and most likely will not come back, we still have plenty of jobs here, and can have a bright future if cost-of-living falls back down to historical norms (say 160% higher than in the rest of CA).
With lower costs, more people will move here, there would be more foot traffic, more money for local businesses, and less congestion. The problem is that it’s very hard for the city’s housing stock to respond to these shifts in real time, and investors got false price signals as to how much they could make, which led them to take on large fixed debts. Because of all of these structural rigidities there will be a period of population loss until we can be cost competitive again. Eventually we will.
I just spent the day training an employee who is replacing an employee who is leaving us for grad school. Same job, 20% less pay than the former employee got as a starting salary. The new one (new grad) is the only one of her friends who has a real job at all – the rest are temping or working at fast food joints. The old one had an apartment in SF with her boyfriend, the new one is living at home with her parents.
I also just renewed one of our office leases. Holy crap, the owner is *terrified* of inflation. If he saw our income, that would be the least of his worries. How the hell could I ever increase prices in this environment. I can’t. If my suppliers up their prices, I’d have to eat the cost increases, I could never pass them on, and they know I’ll change suppliers, so they can’t do it either.
The owner is doing some tenant improvements, scheduled over the next two years and he wanted a not to exceed cost for two years from now. I suggested 200% of today’s price and he took it. Prices going up 2X in two years? What planet is this guy living on.
In a world of overcapacity, until a world war comes along to wipe it out, we’re all stuck.
“I would distinguish between jobs and income. SF is still a net jobs exporter,”
No one can say for sure but 20 years from now if things continue as they have SF will be a net jobs importer.
In the pasat 6 months Bishop Ranch alone in San Ramon has seen a much larger amount of new office space leases than downtown SF. Oakland and San Jose, though depressed too, have seen some significant new leases.
I don’t see the jobs coming back to SF. it will remain the toruist center of the Bay Area but will increrasingly be a less and less significant jobs center.
I don’t think lower rents and real estate prices will turn things around. In 20 years San Jose/Silicon valley will certainly be a larger jobs center and perhaps downtown Oakland too. The exurbia center of Concord/Walnut Creek/San Ramon/Pleasanton could eventually come to rival downtown SF as a jobs base also.
This all even as the overall Bay Area fades as a jobs/business center to the Texas cities, Atlanta and Seattle.
LS: scary inflation is years off. we’re in way scarier deflation now, and for at least 3 years, probably longer. without jobs, there will be no demand, and no inflation. there are hundreds of trillions of dollars of bad CDS the banks need to unwind. they are zombies. inflation is a chimera right now (and can be contolled with monetary policy). deflation is very real, and it can only be handled by letting it play itself out.
how much rent are missing out on each month your building is empty? lock your lease in now; rates will be much lower as we dive deeper down…
I worry less about deflation than I do inflation. While deflation bodes well for those who are cash heavy since purchasing power is stronger, inflation of 15% will kill off the economy by reducing the money flow.
I also think that inflation will come sooner than people realize, in the next year or two irrespective of the job situation. Food and gas costs are already up, utilities bills are higher, public transportation costs have increased, and soon taxes will go up. The unprecedented printing of money will weaken the US dollar for many years driving higher prices for goods while wages are decreasing.
That’s funny, Live Smart. Who is going to buy the goods, if everyone has less money?
I really think what’s going on here is a sense of being left out. So you are imagining that dollars emerge from some Fed printing press and consume goods all on their own, while everyone stands by poor and watching.
Never mind that there are only 2 Trillion dollars to support 14 Trillion in output, and an asset base of 60 Trillion. Really, what do you care if instead of having 2 cents in currency backing every dollar of your assets that there are now 3 cents? Do you think your checking account will double as a result? And if you don’t have more purchasing power, then what do you care about how many dollars back that purchasing power? I mean, you aren’t planning on starting your own bank, are you?
Just think a little bit about what you are saying, and you’ll see that inflation isn’t some bear that jumps out of a bush and mauls you. It is you! It is you, getting so many raises and windfalls that you load up the truck with plasma TVs, the factories are running at full capacity, and still you have excess purchasing power to buy even more plasma TVs, and so you bid up prices.
Alternately, there is a shortage of sand and copper, or everyone is too lazy to show up for work, and so only a small number of plasma TVs are produced relative to everyone’s purchasing power, and so prices are bid up.
In either case, inflation can only come about if wages rise faster than output — I am not worried about that now, as wages are now lower, in nominal terms, than 10 years ago.
The last time we saw high inflation was in the late 70’s/early 80s, in which wages were rising at 15% a year and capacity utilization was running at 85%. At the same time, real productivity grew less quickly, meaning people were producing less relative to what they were earning, and therefore prices rose.
Moreover, if most of your wealth is in your own earning power as opposed to being stored in assets, then you benefit from inflation — which is another reason why there is a very firm political consensus against it.
Basically, it would require an FDR-like tidal change in american politics to bring about elevated inflation, and from your post, I sense that people are too demoralized and disorganized to take matters into their hands and force wages higher. Moreover, they have been brainwashed into thinking that this isn’t something that they should even want. The victory of asset holders is complete, and all that’s left to do is to watch them cannibalize each other as they are forced to lower prices in search of dwindling purchasing power. Perhaps later we can have some sort of power shift that would bring about inflation. Nothing for you to worry about now.
Is Silicon Valley over-leveraged to the consumer? What’s the portion of new companies that will be created in SV in the next 10 years that will not depend on an advertising model, to generate revenues? Advertising, marketing, consumer research, consumer-apps. What’s SV and SF Bay going to produce outside of that portion of the economy?
Robert: thanks for your well-thought out analysis of the inflation concern. I have listened to many economists and political pundits as to what the economy would look like in five years.
While I expect no to little growth in the next five years, my concern is primarily with what will happen in 2014 and beyond. Perhaps it look the same, or it may not. I like to get a sense of the best and worse case scenarios.
“Moreover, if most of your wealth is in your own earning power as opposed to being stored in assets, then you benefit from inflation”
this depends on the assets one owns. As Livesmart and tipsters’ LL have shown, most RE investors are acutly sensitive to future inflation, and for good reason. Timeframe speculations aside, owners of RE benefit tremendously from inflation, given that their assets produce income derrived from overall economic purchasing power (which is linked to inflation.) it would be foolish for any commercial LL to lock in a 5+ year lease without any compensating formula for future inflation.
I only have 1 upcoming commercial space, as everything else is residential, so I’m less concerned about long leases. But I’ve heard that some commercial LL’s are knocking the rents down alot to re-lease quickly, but only for short term leases. I suppose the applicability of this depends on how capital intensive the tenant is. I think that long term, cap intensive spaces due to expire shortly will have the hardest time in this market.
Consolidation seems to be a growing trend, as, you know, those Millenials just love sharing a desk. I’m GenX, so I guess I wouldn’t understand…
Today, large companies in San Francisco such as Charles Schwab (500 to 600 layoffs this year) are moving workers closer together and subleasing the extra office space to generate cash. As of January, according to Studley, a local brokerage firm that represents tenants, about 2 million square feet of subleased office space is on the downtown market, the most since the recession that followed the Sept. 11 attacks.
Live Smart –
A plug for your tenant, Latte Express, really, really good vietnamese sandwiches. I agree that CCSF will have a positive impact on the neighborhood, and your possible lease rates. Can you take a discount on someone who will stay only until the school’s open?
OneEyedMan: I am sure Latte Express thanks you for your continued patronage and your plug! The mom and pop owners are really great, hardworking, and family-oriented folks. (No, I am not related to them.)
Regarding potential short-term tenants, it doesn’t make a whole lot of economic sense for me to do a short term rental of 1-2 years. The commission that I have to pay my leasing agent (Edward Plant Company) is 6% for the first year, 5% the second year, and so on.
As far as rent concessions, it would depend on the extent of the tenant’s intended use, length of lease, and capital improvements on the place. The space (retail, mezzanine, and full basement) can be used currently as is and/or with minor cosmetic changes (new paint, light fixtures.) Or depending on use, you can upgrade the electrical panel (approx. $10K), and/or do a nice remodel (approx. $10K) However, to convert it to restaurant use, it is about $140K to put in a full kitchen and a full vent hood.
LiveSmart- Couple of questions for you wrt commercial rentals.
1- generally speaking, how would you go about negotiating an intensive renov of the space like a restaurant? Besides basic supply/demand for restaurant space, I imagine if having a restaurant space is important to you, that would be a factor. Meaning, if the tenat pays for improvements, perhaps you give them a deal on rent. In the future, your space is already restaurant ready. Is that a possible scenario?
2- similarily, how do you maximize your returns wrt tenant improvements. For instance, if a retailer can just paint, etc. And the rent you can charge them is as good/almost as good as another use, isn’t that optimal? Or maybe it would take too long to find that tenant profile, wheras tenant B wants you to put in say $5k and they agree to 5 years at a decent rate.
3- say a tenant agrees to 5 years. They go broke year 2. RU basically stuck getting rid of them asap and finding another tenant (similiar to residential if you get a dead beat?). Or can the deposit or legal action give you assurance? (my guess is that with small businesses the leas has little power, unless the owner has assets.)
4- lastly, regarding your space, can u advert it direct on craigslist and not pay broker fees? (my guess is no). Or, how about going that route before enlisting a broker for the listing. Is this a worthwhile option?
I’d appreciate your input. As I mentioned, I’m going to have a small office (in mixed use bldg) as my first foray into commercial leasing early next year, and I have a feeling it’s a whole lot different than residential (which I’m familiar with.) so I certainly appreciate any input that you have. Cheers!
45yo hipster –
1. I negotiate restaurant uses as I would for any other uses. Restaurant owner pays for all renovations as he/she sees fit and will get a 10-20 yr. lease (with mutually agreeable rent increases.) If the restaurant fails, the tenants typically sell their entire restaurant along with whatever is remaining on their lease. In my 30+ yrs., I have yet to see a restaurant sell at a lost. Whether you build out/convert space to a restaurant or buy an existing restaurant, it will cost upwards of $150K or more.
I recently spoke with the building owner next door which housed the former Los Socios, the Mexican restaurant on Sacramento St. Business was slow so the owners of Los Socios decided to sell the business. New tenants, a French restaurant, plan to open up as soon as they get their wine and beer license.
2. Generally, I don’t put up any money for tenant specific improvements or renovations. What works for one tenant may not be suitable for another so it is just wasted money from my perspective.
3. Commercial real estate differs vastly from residential. I own both as well. For one, the former is liable for the cost of the entire of the lease. Say, your lease is $5K a month for 2 yrs., if you default, you are on the hook for $120K. Another difference is that commercial tenants have a lot more liquid assets than your typical renter. All of my commercial tenants are already homeowners. Therefore, I would look for tenants who are well-qualified enough to pay $120K plus whatever other business and personal expenses they have.
4. I went with a broker to save my time and assist in weeding out folks who don’t fit my tenant profile. There are no shortage of folks with big business plans but no realistic way to take those plans to fruition. It isn’t just about getting a rent check every month — I like to see good folks set down roots, succeed in their business, and make a positive impact in the neighborhood (like Latte Express.)
Good luck with your mixed use building.
^ thanks for answering my questions.
regarding your restaurant example above, if a tenant has a 20 yr lease with you and wants to sell the biz/lease at year 10, i assume that their ability to transfer the lease at the current rate is an asset (assuming rents went up.) i thought that a LL would want to renegotiate a new rate with a new tenant? OTOH if the current tenant invested $150+k in the kitchen, i assume they would want some way to recoop/transfer that investment to the new tenant. what is customary for this secnario?
as for my space, it’s a 700 sq ft ground floor office space in the NEMIZ (northeast mission industrial zone) which is mixed residential and office/PDR. it’s sort of like alternative office space, suitable for a small design/internet firm, artists, etc., as it’s in a mixed use area. my guess is that many of the people interested in this space will not necessarily be well capitalized, and they would possibly only want 1 year leases. so i suppose the positive is that i can raise rents easier with shorter leases, but that i may also have more turnover, as these tenants seem less stable than what you are talking about with your space. also, i think i’ll just throw it on craigslist, as i am not sure a broker would be of much benefit. any thoughts or comments about the best way for me to lease this space?
^^^ glad to be of help even if it is only from my perspective…
Generally I have an assignment clause in my commercial leases which allows for transfer of the lease at any stage provided that the assignee meets the same financial criteria that I require. If the restaurant tenant wants to sell at yr. 10, the new tenant assumes only what’s left of the remaining 20 yr. lease. Determining the value of the business, the remaining 10 yr. lease, and goodwill of the restaurant is left up to the restauranteurs themselves and I have no part in this transaction. However if the new restauranteur wants a longer term than in the original lease, then we can negotiate.
You are correct about the tenant profile for your space. Doesn’t hurt to try Craigslist to test the market, but be prepared to listen to unrealistic demands. Many start-ups want flexible leases and very low rents. I have had companies ask for a month to month lease and to pay their rent in stock options — I passed. If you decide to do a 1 yr. lease, make sure they have that much in the bank in addition to their business expenses. I may even ask them to pre-pay six months worth of rent.