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According to The Corporate Real Estate Letter, San Francisco ended 2009 with 70,931,839 square feet of occupied office space for a vacancy rate of 15.6% versus 80,252,228 occupied square feet and a vacancy rate of 3.6% at the beginning of the year 2000.
The Corporate Real Estate Letter [naibtcommercial.com]

Comments from “Plugged-In” Readers

  1. Posted by Gil

    Interestinmg stats. Especially the drop in total office space in SF over the deacade. And still the vacancy rate is much higher.
    I think the sluggish recovery, the growth in telecommuting and the dearth of companies relocating to SF in the past decade all augur a future in which significant additional office space is simply not needed.

  2. Posted by Gil

    I meant to say the decline in total occupied office space in the psst decade.
    Seems I recall some here arguing that SF has been absorbing about a million feet of space per year. Not true. Its more like shedding a million sq ft/year.

  3. Posted by dr. who

    Not surprising as you are comparing the tail-end of the unprecedented boom of the dot-comers with the unprecedented virtual collapse of the global financial system.

  4. Posted by Dan

    Yes, aside from the dot com bubble and the current economic crisis, office occupancy has been increasing over time. There may never be a speculative boom as focused on SF office space as the dot com bubble, but remember that was a time when non-profits were being evicted en masse from office space to make room for speculative dot coms. That kind of demand for space wasn’t healthy either.
    We are not talking about Dubai-like growth when we talk about SF, but zoning should allow for the likelihood that growth will resume at some point in the future.

  5. Posted by David

    The interesting point is not just that occupancy is in the toilet, but also that it’s not coming back in SF proper with cheaper rents. Why? Because of the idiots running the city –requiring health insurance, the payroll tax etc.
    The Peninsula and East Bay have gotten cheaper too. Guess where new businesses will locate?
    If the City cuts back on red tape, the advantages of SF (convenience etc) will again shine through. Otherwise, it’s Foster City for you!

  6. Posted by D

    Comparing the current situation to the height of the dot-com boom is meaningless. However, it’s interesting to note that the current situation (which was initiated by residential issues) looks quite similar to the dot-com bust (which was initiated by commercial issues).
    Not sure what it all means, but it is food for thought.

  7. Posted by Gil

    “We are not talking about Dubai-like growth when we talk about SF, but zoning should allow for the likelihood that growth will resume at some point in the future.”
    What kind of growth then? It certainly wasn’t a million sq. ft./year over the past decade – most of which was boom times.
    If this becomes a lost decade will the net absorbtion even be 500,000? I think that is a generous guess and at that rate it will take 26 years for the existing empty SF office space to fill up.

  8. Posted by lyqwyd

    I find the graph a bit suspicious, what accounts for the loss of several million square feet over about six months from the end of 2004 to about mid 2005? I doubt that much space could have been converted to other uses in that short a time, or that that many buildings could have been demolished.

  9. Posted by wow

    lyqwyd,
    That’s an interesting find.
    One theory is the conversion of warehouses into condos. The commercial RE bubble popped while the housing bubble started to really inflate. Maybe it’s a reallocation of assets. SOMA is full of old commercial buildings that have been converted during the past decade. Even though they are often live/work units, they get off the market as available commercial space. A side-effect: these come off the grid as soon as the transformation is started.
    Another theory: maybe this is the result of property owners putting previously unused buildings (think old warehouses) for lease after Y2K as a result of the increase in demand (and prices) during the dot-com bubble. They come too late (it takes time to turn around), the dot-com bubble pops, rates go down, vacancy increases, it takes them too long to react, the business model is not viable anymore, some landlords go out of business and their square footage come off the grid while the mess gets sorted out. For residential, think One Ecker: 10,000s sf in limbo for 2 years now.
    Note there’s an apparent 4-year delay between the start of the occupancy plunge and the decrease in number of total units online: the time it takes to move square footage from one sector of RE to another? Same thing between the rise in occupancy and jump in available square footage: time it takes to deliver new construction?

  10. Posted by Dan

    During the dot com era, many non-office spaces, including industrial spaces, were converted to office space. After the dot com bust, some of these have been converted to other uses. For example, after the crash, dot com offices were converted to the nightclub Mezzanine.
    A no-growth prediction assumes that there will be no need for new office space until demand returns to 2000 levels. However, over time, space less suitable for commercial purposes, due to location, age of building, building design (e.g, converted warehouses) will find other uses, even as newly built office buildings get filled with commercial tenants.
    Arguing against perpetual decline in occupancy is demographics. Unlike Japan, the US is growing, with a 100 million person increase in US population predicted by 2050 (as Japan and Europe experience population declines). Some of those 100 million will settle in the greater SF Bay Area and work in SF, sooner or later. SF’s accessibility to transit will be an ever greater selling point over locating in San Ramon or Pleasanton.

  11. Posted by Frank Fudem

    Thanks everyone – I am the author of that graph. I appreciate the comments.
    Re: the reduction in the overall supply of office space that occured around 2004/2005: a building or two might have been domolished but the bulk of the decline in supply is due to the conversion of office to other uses, primarily residential or hotel: about 3 million sf were converted from office to other uses in a very short time.

  12. Posted by NoeValleyJim

    Hopefully nobody thinks that 3% vacancy rates are a good or healthy thing. Two different booming dotcoms I worked for tried to find office space for expansion in the late 90s. The first one was a Berkeley startup that really wanted to stay in The City. They literally could not find any space large at any price and ended up having to relocate in San Mateo.
    The other one found space in SOMA but could not find enough space for expansion and ended up having to put two employees per desk (not a formula for good productivity, especially for programmers) and started building their own expanded office space across the street. They flamed just as the space was completed though and it is now the Mexican Embassy. It always gives me a smile when I walk by it and see the lines of people lining up for visas at the erstwhile world headquarters for what was briefly a $1B market cap company.
    I don’t think there is any consensus on what a “healthy office vacancy rate” is but I would think that you want at least 10%, to help keep rents down. Rents are down and this should certainly encourage the formation of new businesses in San Francisco. I can say with no reservations that the rate of growth of new technology startups is higher now that at any time in the past, even during the dotcom boom. A few years ago, these companies would have all located in Silicon Valley, but the low office rents are keeping many of them here.
    In the longer run, San Francisco badly needs to invest in transportation infrastructure if we are to continue to capture new businesses. BART and the Bay Bridge are both close to capacity. HSR will help, but we really need another Transbay tube. I don’t know if BART has the political will to invest in the core part of the system anymore though, all the money is going into suburban station expansion and boondoggles like the SF Airport line.

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