According to Colliers, 2,253,339 square feet of commercial sublease space is currently on the market in San Francisco, down 158,186 square feet over the past 40 days on 33,727 square feet of net absorption along with withdrawn listings.
The percentage of space available for sublease that is currently vacant is 61 percent.
∙ San Francisco’s Commercial Sublease Snapshot: November 2009 [SocketSite]
Does anyone have the total number for space avaiable in SF? The commercial sublease numbers are a fraction of the total available office space.
Net absorption is nil and vacancy rates in commercial sublease space rose sharply in the 40 day period.
The SF CRE market is bleak for the foreseeable future. Several factors are driving this.
Much of the spec space taken during the boom was by the finance and legal industry. Those have been wiped out and that has really hurt SF. The lack of job growth for the indefinite future in SF (and generally California) is likely to push CRE prices down even further in the city.
If that wasn’t enough, a damper is being put on the need for commercial office space going forward because of the internet and tele-commuting. This affects the whole country which is why recovery of CRE (and retail) will be subdued.
Its a double whammy for cities like SF that are in decline.
Realitically how long will it take to fill all the empty space? A decade, two, more?
What of the 100 story office tower that was supposed to be the crown jewel of the HSR center on Mission Street? Does anyone really think it is going to ever get built? That will have a tremendous ripple effect on the grandiose plans for the area.
A pertinent observation from Charles Smith (OfTwoMinds) on the paradigmn shift about to take place in the office (need for) market across the US:
“There’s even more trouble on the horizon. The wave of creative destruction unleashed by the Internet has yet to envelop commercial office space – but it will. Just as online shopping has decimated retail sectors such as bookstores, the Web is busy revolutionizing white collar work, the mainstay of office towers and business parks. Real work can now be done remotely at a home office, cafe or anywhere but a cubicle at headquarters, and the cost advantages of this flexibility will not be going away. Yes, there are still powerful reasons to meet in person, but there are equally powerful reasons to downsize travel and office costs permanently.”
This isn’t to say demand for CRE is going away. It is to say that the huge demand seen in the bubble era and before and the explosive growth of office buildings and office parks will not be seen again in anywhere near what occured previously.
For a city in decline as a business and jobs center as San Francisco is, this will be an additional factor that, IMO, may preclude any future real recovery in the CRE market in SF.
If RE was a free market, landlords would lower rents until the market clearing price was reached. There would be competition. Unfortunately, RE, like banking and stocks, is a scam, a racket, a Ponzi scheme engineered to steal money from those who create wealth (workers) by the useless vampire rat landlord-banking-politician class. Curious, isn’t it, that the wealth of the richest 1% is skyrocketing right now? Sleep well, for when we are hungry enough, we will come for you. Heh. No really. Just joking. Not.
Gil: interesting observation by Charles Smith on the diminishing demand for CRE due to the internet and telecom – the very industries that spurred the tech bubble and the corresponding CRE bubble to begin with.
But soon, we will have computers and robots which will be self-replicating and able to develop their own aps, write their own programs, and create their own markets…
So, the inefficient human tele-commuter will become obsolete. These dead-weights will need to be forced from their homes/offices, so that we can house the new generation of self-sufficient robots and computers – the future engines of our economy.
Humans shouldn’t worry too much, though. There are other species which find us delicious, so we will always be in demand.
not so sure I’d go so far as to say that SF is in decline.
SF has its problems, but so does nearly every major metro area. I’d say that overall SF has many things that make it a good bet long term.
That said, SF is priced for absolute perfection. IMO that will have to change.
The greater SF Bay Area does have a severe overcapacity of commercial real estate
this is all quite easily fixable, and you brought it up yourself. Lower prices.
Space costs are just not that high. Typical cost for a new hire might run about $750 per month. If rents drop by a third, that only saves me $250 per month per employee. After taxes, it’s $125. Big deal. I’m not going to go out and hire lots more employees because my costs just went down by $125.
On the other hand, if housing prices fall by 1/3, and I can drop salaries by about as much, that not only saves me $1000 per month for a new hire, and more for more senior employees, but it also means my taxes go down: Social security and medicare. Workman’s comp insurance is also tied to salaries, so that also drops when wages drop.
The only real fix is to lower wages, not the price of office space. Only that will get more people hired than we have now. The only way for that to happen is when housing prices fall to their natural equilibrium. Office rents falling by 33% isn’t going to do squat.
If it isn’t Chicken Little with another “the sky is falling (hic)” post.
nnona: No, the sky isn’t falling; it’s all those “Available” and “For Lease” signs all over town!
tipster: the inevitable and unavoidable reversion to the mean means that office rents will fall by much more than 33%. Also, lower rents means that other types of businesses, which have been priced out and told they are obsolete, will be able to move into formerly overpriced office space and hire workers. Business which actually employ people who make and fix things, and provide real services. You know, people who can do such awful, shameful things as baking bread, repairing cars, fixing appliances, making furniture, etc.
We don’t need any more bankers, used house salesmen, insurance agents, and so on. So all that commercial space is DEAD and needs to repurposed back to what it formerly was, because the bubbles. are. not. coming. back.
If you want to have a serious discussion of commercial office — – you need to get the right underlying data — one of Gils points.
The generally accepted “size” of the sf office market is 80 MIL square feet – all classes of space and all submarkets, With generally accepted way of dicing it down from there. Sublease activity is a relevant factor, but on the 2nd tier of importance.
Much of this data is available of CBRE website of CAC groups website. someone should post it here. sorry my IT skills are limited.
“tipster: the inevitable and unavoidable reversion to the mean means that office rents will fall by much more than 33%. Also, lower rents means that other types of businesses, which have been priced out and told they are obsolete, will be able to move into formerly overpriced office space and hire workers. Business which actually employ people who make and fix things, and provide real services. You know, people who can do such awful, shameful things as baking bread, repairing cars, fixing appliances, making furniture, etc.”
Problem with this is that these services no way could ever fill the millions upon millions of square feet of empty office space. Don’t think we are going to see a baker on the 40th floor of the BofA tower. Most of these service businesses are “ground floor” operations.
The empty office space was built for another type of business operation which is not coming back in SF.
Maybe at some point some of these towers will re-invent themselves as residential structures.
The question remains – who is going to fill these towers? The answer is painfully obvious.
Another quote from Charles Smith that nails the SF dilemma:
“High growth companies that once hired hundreds of employees and rented entire floors increasingly offer highly automated products and services. New-tech juggernaut Twitter recenlty leased more space in San Francisco as it was expanding its 30 person staff to maybe as high as – gasp! – 100 employees. Will Twitter be filling that empty office tower near you? No, because its “service” is largely automated software.”
Gil, Microsoft, another company whose service is largely automated software, has moved to leasing almost entirely in new 40 story towers (their primary new office space of the last year has been in three new office towers in downtown Bellevue – two towers at the Bravern and one at Lincoln Square). Their rationale for this move? Younger, well-educated people are increasingly flocking to more urbanish areas (including downtown Bellevue, which is absolutely riddled with buildings that look exactly like those in Mission Bay). Bellevue also happens to have some of the most expensive leasing costs in the Puget Sound area.
Perhaps this won’t play out with similar companies in the Bay Area, but it certainly shows that making your TALENT happy is the biggest determining factor of where new office space is.
Gil, are you quoting from his book or blog? BTW, I happen to agree with your thoughts and believe that the idea of everyone in a company needing to be stacked above eachother 50 stories high in a trophy building in an expensive urban core neighborhood is a design of the past. Despite our self proclaimed love for density, it seems that most high growth companies chose to build low density campus type work enviroments, and these are FAR from the traditional urban core.
I don’t disagree with the points above, my only issue was ex-SFer, with whom I almost always agree, indicating that the solution to empty offices was lower rents.
If rents fall by 33%, that just isn’t going to make me or anyone else hire in the current economy. I’m sure rents will fall, how could they not, but it won’t expand employment because big drops don’t translate into significantly lower costs.
Add that to the near certainty of higher health care costs, and sluggish demand and there is no good reason for most businesses to hire right now. My auto mechanic tells me business is down – people are only doing essentials. Bread is on sale for low prices every week, so demand must be weak. Furniture companies are deleveraging along with the rest of the economy, and without lots of new housing, the need for as much furniture production as in the past is grim. And I’m not sure that $125 is going to cause a surge in hiring of people for appliance repair.
The name of the game right now is FIRING, not hiring. Employers are getting ahead of the looming health care costs by continuing to downsize. Large companies indicated that after the first of the year, there will be more companies reducing employment than increasing it. This article was posted and then quickly removed from SFGate.com, because, as noted by one commenter who was surprised to see it at all, it didn’t fit “the Agenda”.
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2009/12/09/BU4C1B10OO.DTL
“but it certainly shows that making your TALENT happy is the biggest determining factor of where new office space is.”
PLEASE Anon, right now the “talent” is going to feel lucky to have a job at all. Also, just a reminder, Bellevue is not downtown Seattle, but instead a large prosperous Edge City with more in common to Palo Alto or other Peninsula cities than San Francisco. Bellevue does not have the taxes, homeless, crime or street poopers San Francisco does.
And Anon, I know those towers Microsoft leased and the tallest is 26 stories, not 40. San Francisco wished it had Bellevue’s economy and clean streets. These towers, as well as a future 9 story campus complex Microsoft will lease when completed next year are an Edge City type density, vs. the Montgomery Street type space we have here.
http://seattletimes.nwsource.com/cgi-bin/EMailStory.pl?document_id=2004387273&zsection_id=2003750725&slug=citycenter02&date=20080502
apologies, here is the correct link:
http://seattletimes.nwsource.com/html/microsoft/2004387273_citycenter02.html
“Gil, are you quoting from his book or blog?”
From an article he writes in the current The American Conservative magazine. Titled “FIRE in the Hole”
BTW, one of the problems in comparing to the Seattle/Bellvue area is that greater Seattle is supposed to be among the top ten cities in job growth over the next decade.
Neither San Francisco nor the Bay Area is on the top ten job growth list. In fact, California’s economy will lag in the recovery. US unemployment should fall below 10% early next year, but California’s is supposed to remain in double digits through 2011.
anonandon, Bellevue will be comparable to Palo Alto when Palo Alto starts allowing skyscrapers to be built.
anonandon, in terms of the demographics that are primarily moving to the two cities, Bellevue has much more in common with Mission Bay than it does Palo Alto.
Neither San Francisco nor the Bay Area is on the top ten job growth list. In fact, California’s economy will lag in the recovery. US unemployment should fall below 10% early next year, but California’s is supposed to remain in double digits through 2011.
Which list are you talking about? Link perhaps? There are dozens of different sources for “job growth lists.”
“Which list are you talking about? Link perhaps? There are dozens of different sources for “job growth lists.””
I am referring to a Forbes list from a few months back.
Yes, different groups put out different lists, but I’d be shocked if SF or the Bay Area made it onto any group’s top ten job growth list.
As I recall the lists I looked at all had Seattle, some even Portland, as top 10 growth cities. But, aside from these two, I did not see any West Coast city listed – SF, SJ, LA, San Diego or Sacramento.
“Bellevue has much more in common with Mission Bay than it does Palo Alto.
Trust me, as someone who lived and owned property in the area at one time (Medina), Mission Bay has NOTHING in common with Bellevue.
I do not mean this as a complaint or compliment to either area, but they are VERY different.
Mission Bay has more in common with an Irvine technology park than anywhere else I can think of.
Gil – here you go:
http://www.forbes.com/2008/07/09/cities-professionals-young-forbeslife-cx_mw_0709youngprofessionals.html
Trust me, as someone who lived and owned property in the area at one time (Medina), Mission Bay has NOTHING in common with Bellevue.
Medina is a different world from downtown Bellevue, where the past five years of endless building has added hundreds of 4-6 story cookie cutter apartment and condo buildings, very similar in form to what you see in Mission Bay or Emeryville.
Sorry anon. That ranking is not for job growth.
Gil – Ok, then here you go:
http://www.employmentwebsites.org/cleveland-shows-most-job-growth-among-top-metro-areas-reports-new-careercast-comjobserf-employment-i
Here’s another:
http://www.newgeography.com/content/00745-large-cities-ranking-2009-new-geography-best-cities-job-growth
SF’s MSA (very, VERY different from SF city-specific data) doesn’t do that great at number 23, but it’s a WHOLE lot better than Minneapolis at 48 or Chicago at 52 (generally places referred to on Socketsite as doing much better than SF).