Posted on: Wednesday, December 26, 2001

San Francisco office rents plummet

By Elizabeth Hayes
Bloomberg News Service

San Francisco — Office rents fell by as much as 25 percent in the San Francisco Bay Area in the fourth quarter, as companies shed space to cut costs, according to data from broker Cushman & Wakefield.

In downtown San Francisco, rents fell about 25 percent from the third quarter to $36.48 a square foot, after falling 20 percent in the previous quarter. In the Silicon Valley, rents dropped 20 percent for "high-tech" space to $24 a square foot, according to Cushman's preliminary numbers.

With the U.S. economy in its first recession in a decade and a 22 percent drop in the Nasdaq Composite Index in the past year, rents in the Bay Area are half what they were in 2000. Cisco Systems Inc., Palm Inc. and Sun Microsystems Inc. have shed Silicon Valley space, while brokerage Charles Schwab Corp. and retailer Gap Inc. gave up San Francisco space, fueling a rent decline that may continue until June.

"We've still got a way to fall," said Meade Boutwell, senior director at Cushman. "What's missing is the demand side."

Catellus Development Corp. pulled the plug on a building at its Mission Bay project in San Francisco, and Boston Properties Co. decided not to start a project in San Jose without tenants signed up, citing lack of demand. Mission West Properties, which specialized in developing for technology companies, cut its earnings forecast for 2002.

The vacancy rate in San Francisco and Silicon Valley rose to about 18 percent from about 16 percent in the prior quarter, Cushman said.

Two large blocks of sublease space came onto the Silicon Valley market in the fourth quarter — 124,000 square feet from Nortel Networks Corp. and 199,000 square feet from Xilinx Inc., Cushman said. Altogether, 24 million square feet of space is available directly from landlords and in the form of subleases.

In a sign the tide may be starting to turn, brokers said they have seen more interest lately from potential tenants.

"December is usually the slowest month of the year by far and we've seen inquiries pick up in the last two to three weeks," said Fred Beaubien, senior managing director at Cushman in San Jose.

The increase in the vacancy rate has slowed since the end of last year when the rate was under 5 percent in San Francisco, said Terry Deming, director of market research at Whitney Cressman Ltd.

"We don't believe the market's bottomed, but we've seen a deceleration," Deming said. "There's more stability than earlier in the year."