Vacant offices hold empty promise

By Brian Bergstein
Associated Press

A lease sign adorns a window in downtown San Francisco, which has numerous vacancies because of the dot-com bust. A record 21 percent of the city's office space is vacant, nearly three times the rate at this time last year, according to the Grubb & Ellis real estate company, and the vacancy rate in the South of Market area is at 49 percent. Associated Press

Even as U.S. companies are adding jobs and home sales remain brisk, the nation's office vacancy rate hit 14.7 percent in the first quarter — the highest since the mid-1990s, according to Reis Inc., a New York real estate investment firm.

It might be hard to summon sympathy for landlords, but thinned-out business districts create plenty of pain for other people — and provide a snapshot of the state of the economic recovery.

"More empty buildings mean less business for everything to coffee stands to small restaurants, cafes, business services, personal services," said business consultant Tapan Munroe, former chief economist for Pacific Gas & Electric Co.

Perhaps no place illustrates the issue as vividly as San Francisco, which is still marveling at how fast the dot-com boom went bust.

A record 21 percent of the city's office space is vacant, nearly three times the rate at this time last year, according to the Grubb & Ellis real estate company.

Bay Area a vivid example

In the South of Market area, the former warehouse district that became known as Multimedia Gulch during the dot-com heyday, the vacancy rate is a staggering 49 percent. It was close to zero two years ago, said Colin Yasukochi, a Grubb & Ellis research director.

Back then, Enzo's Ristorante in the heart of the area used to serve lunch to 90 people a day. The answering machine often would be full with reservation requests when owner Renzo Romero arrived at the Italian joint at 9 a.m.

Romero has since reduced his midday staff from eight people to four and sometimes gets as few as 10 lunchtime customers a day.

"It used to be like a flea market around here, with so many people walking around," Romero said. "Now, Monday through Thursday is like a Sunday. All the restaurants are taking a big hit."

The cities with the highest drops in office rents this year all are high-tech centers: Boston, Oakland, San Francisco, San Jose and Austin, Texas, according to Reis. Phoenix, Dallas, Denver and Columbus, Ohio also have vacancy rates of more than 18 percent.

Although the Internet economy started to tank in 2000, constructing an office building can take nearly two years, so some new complexes are just now coming open after the demand has dried up. Grubb & Ellis found that 331,000 square feet of office space is under construction in South of Market.

Other real estate firms put San Francisco's overall vacancy rate lower, around 16 percent, and say occupancy rates in smaller-sized offices and in the city's financial district are even healthier.

"We're back to the same market we were at between 1986 and 1998," said Hans Hansson, president of Starboard Commercial Real Estate, which leases and sells office space.

But there's no disagreement over the results. Top-tier office space that rented for more than $80 a square foot two years ago now goes for about $33.

Too much to sublease

That isn't bad only for real estate companies. Many businesses that have scaled back since the bust find it nearly impossible to sublet their excess space.

"Almost every office you go into, there are at least a few empty offices and cubicles," Yasukochi said.

Even after being burned by the dot-com meltdown, office brokers still ooze optimism — at least partly because sharing bad news about the market just encourages tenants to try to wrangle ever-better deals.

Some said they are already hoping the next boom comes from clusters of new biotechnology companies.

"It's difficult now, but there's activity and people making deals," said Leland Whitney, managing principal of Whitney Cressman, a commercial real estate firm. "It's just a question of when the Bay Area is going to have its next disruptive technology, and we'll be back."