San Francisco Chronicle writer, Tom Abate, addresses this question pretty eloquently in “Why Silicon Valley Faces Fresh Threats” (February 11, 2010). Unfortunately, the forecast isn’t rosy. He cites “fresh threats” from “a shakeout in venture capital, a foreign brain drain and a crisis in California education.” Considering the 16 million square feet of vacant office space in Santa Clara County, this block of space will continue to cheapen as the area competes to maintain its current base of tenants as well as attempting to draw tenants from surrounding areas. Can Silicon Valley be the centerpiece for economic “recovery” in the Bay Area? I think it’s unlikely for the foreseeable future. But this news, tenants, spells more opportunity for you than ever. We should discuss your company’s office leasing status and how to take advantage of market conditions. Get in touch today.
With credit to John McEnroe (“You can’t be serious!”), was it hard to believe that American Express, Goldman Sachs and other financial institutions morphed into bank holding companies to save their own skin during the onset of the Grecession (the Great Recession)?! This conversion, courtesy the Federal Reserve but at taxpayer expense, has brought near-overnight success and billions in profits to these newly formed banks by allowing instantaneous pocketing of ~2.5% on every dollar which passes through their hands. Enough with that! We’re going to file to become a bank! Our firm has no debt, so our application will look at least as attractive as American Express’. Arbitrage, here we come. Please let us know if you’d like to join in.
Our bank will trade in derivatives, of course. In 2009, we wrote an article launching our new concept of ‘Office Space Derivatives’. Hopefully the new financial reform bill won’t exclude this instrument from the exposure it deserves.
Moody’s, S+P and Fitch will likely give us an AAA-rating. With a little luck, Warren Buffet (Moody’s largest investor, who knows not where Moody’s is located) could be our anchor investor.
Recently published are a couple of eye-popping, revealing articles about the condition of the commercial real estate markets—with emphasis on the landlord and lender—with little sugar coating. To all tenants/our clients: taste them for flavor, or pore through the gory details. Building owners will need to look to 2012 and beyond for signs of any true “recovery” from the Great Recession. In the meantime, that spells opportunity for YOU. Let’s talk over lunch about the impact on your tenancy.
- Further Slide Seen in N.Y. Commercial Real Estate
January 8, 2010. New York Times.
$12.5 billion worth of New York office buildings are heading into foreclosure or bankruptcy. Is New York a bellwether for the rest of the nation? There can be no doubt.
- Fallout Is Wide in Failed Deal for Stuyvesant Town
January 26, 2010. New York Times.
Focuses on the fallout for San Francisco landlord—New York based Tishman Speyer Properties; BlackRock Realty and others…
In the Buyer-Beware category, last week the San Francisco Business Times carried the following story (Promontory’s Spear tower lease sheds light on market, January 22, 2010), meant to “enlighten” you about the “real” market for high-end office space in the City. I’ve highlighted in red some of the salient points of the article.
Promontory Financial Group has leased 9,200 square feet on the 41st floor of the Spear tower of One Market Plaza, a deal that helps put a value on what San Francisco’s most desirable office space is worth in the current depressed market.
The financial company, which advises troubled banks “resolve their most pressing issues,” has agreed to pay just over $60 a square foot over 10 years. The space, last occupied by Accenture, would have leased for $100 a square foot in 2007 at the height of the last boom. In September of 2007, Artis Capital Management leased 18,000 square feet on the 26th floor of the Stuart Tower at One Market for $100 a square foot.
Promontory opened its San Francisco office at Embarcadero Center One in 2004 with two employees. The firm has since grown to nine, and the new space will allow it to expand to 20 people.
“We were delighted to get a long-term lease at what we think is a very competitive rate,” said spokeswoman Debra Cope. “We think it positions us well for future growth plans in San Francisco.”
Riccardo Gale of Cornish & Carey Commercial, who represented the tenant with Donette Clarens, said the Promontory space, which is being designed by Gensler/SmithGroup and built by GCI, has mind-blowing views of “Farallon Islands to San Jose.” Wes Powell and Chris Roeder of Jones Lang LaSalle represented the owner.
“People like to say that the A ++ space has not fallen very much — I think in this deal we’ve demonstrated that it has,” said Gale.
I offer you this rebuttal:
- Agreed, the 41st floor of One Market Plaza should be the most expensive space in San Francisco. Also agreed, that “market” is where folks sign deals. All told, however, $60+ per square foot per year is a ludicrous rate for any tenant to agree to in this economy, no matter the building in San Francisco.
- The tenant’s spokesperson said, “…we think this is a very competitive rate…and positions us well for future growth plans in San Francisco.” However, 27 years of experience tells me that tenants paying $60/sf/year will likely be troubled tenants. These are Dot-Com rates, which were far from sustainable for the mass market. To say that these rates are “competitive” suggests that there is active competition amongst tenants to pay such rates—a gross exaggeration at this point.
- Don’t miss the forest: The tenant cited is in the business of advising troubled banks. Why would they (a) seek such high profile space to assist failing banks; and (b) sign a 10-year lease, unless they foresee a long-term continuation of the decline in the economy and, therefore, growth in their clientele?
- Average occupancy for most tenants is ~200 square feet per person, yet the tenant, here, suggests that the 9,200 square foot space will accommodate only 20 people (460 sf/person). Perhaps these people, like Artis and Accenture, have money to burn. At capacity of 20, if the firm spends 8% of its gross revenue on ($60) rent, each of those 20 employees must generate $345,000/year in revenue just to pay for their space. Does that make sense to you?
- Last but not least, the article quotes the tenant’s gloating broker, touting how $60 is so much cheaper than at the height of the market. Would it help make my point to divulge that at the same time the Promontory deal went down, I concluded a similar sized lease for a law firm client in Bay view space just across the street, in another Class A building…at less than $35/sf/year?
The SFBT article continued with a bit about the market for building sales, featuring quotes from Dan Cressman.
The sale of 49 Stevenson St. could be the last of the sub-$200-a-square-foot deals for downtown Class A office buildings.
That’s the take of Grubb & Ellis broker Daniel Cressman, who represented investor Steven Pan in his acquisition of the building for $24.2 million, or $190 a square foot. Cressman said that Pan beat out more than 20 other bidders, and given the number of opportunistic investors out there and the dearth of buildings coming on the market, competition is likely to drive bidding for subsequent properties over $200 a square foot.
“It’s been dry in terms of new product on the market, and there is a phenomenal amount of interest for good-quality, well-located real estate,” said Cressman.
Lest you forget, this is the same Cressman who three years ago spoke alongside our Mayor at the SFBT annual breakfast, assuring tenants and his investor clients that $100/sf/year rental rates would be commonplace as the new basis for average rents in the City. Cressman and Grubb & Ellis were among a crowd of brokers and advisors who were as complicit as any on Wall Street for the run-up in building prices.
- Now Mr. Cressman has picked the proverbial “bottom” of the investment market. Is he any better now than three years ago at underwriting deals and predicting the economy?
- Is there a “dearth of buildings coming on the market” because prospective sellers don’t like today’s pricing…or is it due to the dramatic decline in available financing and inability to underwrite deals in this failing economy? The lack of volume of sales also has everything to do with current owners and their lenders frozen in place—neither able or willing to handle the harsh reality of lost equity and pissed off investors.
- The market will seek whatever levels are necessary to make ends meet. There could be plenty of downside from $200/sf. After the Dot-Bomb, for example, when tenants folded their tents at Market Center (555-575 Market), Tishman Speyer defaulted on the loan and the 80%+ vacant complex sold for ~$110/sf…
What do you think of my analysis? Leave your comments below or give me a call and let’s get together to discuss.
As an open and aggressive advocate for commercial tenants, quite often I publish articles in your interests or am featured in interviews published by others. Keep in mind the following theme. In many respects, dealing with the landlord community is much like dealing with the Government: It’s their way or the highway. Lease negotiations are oftentimes akin to David v. Goliath, therefore. If you could use a highly experienced, “David” with black-belt resources on your side, please let me know.
Earlier this year we had three press opportunities which you should study:
- In “Office Tenants Pay for More Phantom Space”, my article published by the California Real Estate Journal, I’ve taken up the issue of space measurement and challenged the almighty BOMA methods commonly employed around the United States. This is a highly controversial topic, yet the response by the landlord community is generally, “my way or the highway”. My research took me to several architectural firms responsible for conducting new measurements; and to several real estate lawyers, both business and litigators. You have a right to know how your space was measured and find some solace that you’re not paying for phantom space.
- In “Office Markets Feel Pull from Law Firm Changes”, the California Real Estate Journal interviewed me for my views on the quaking legal community and its impact on the office marketplace. The paradigm shift away from unlimited hourlies has taken place. Law firms—businesses—are reeling alongside Corporate America.
- In “Office Markets Shun Tenants’ Market”, The Registry interviewed me about the landlord community’s response to the down economy. As ever, landlords are slow to adjust to obvious and severe changes in the economic landscape. What should you do about it, tenants?
Please let me know if you found these materials to be helpful and enlightening.
A local video team from CBS Interactive went to the California Academy of Sciences to take a look at the at the green innovations inside, including the living roof that helps reduce energy use, a solar energy installation that cuts down on carbon emissions in the atmosphere, and a building management system that manages temperature and humidity throughout the building.
As you may recall, Mihalovich Partners represented the California Academy of Sciences, negotiating the lease for their 204,000 square foot temporary home at 875 Howard Street—the largest lease in San Francisco in 2003 and probably the most complex, to date.
I’m proud to continue my relationship with the Academy at their new home in Golden Gate Park as a Green Building Guide stationed on the living roof. And I’m excited to see that the buzz surrounding their new green building has yet to subside.
Have you visited the Academy yet? We’d love hear about your experience there and how we can help you with your space needs.
Statewide and regional press recently called on me for market commentary and advice to the commercial tenant community. Perhaps you’ll find these pearls to be of use to you and your company…
100 Words of Advice to Tenants
When the California Real Estate Journal/Daily Journal (the Statewide legal rag) called me for a condensed piece of market advice, this was our sound-bite:
“Know that we specialize in representing tenants, only. Tenants shouldn’t be concerned about picking ‘the bottom’ of the economic meltdown. Our mantra for tenants during the past 27 years is to lock in affordable rent for each and every year of your lease; commit 8% or less of your gross revenue to rent. San Francisco’s office market, like every other major city on the planet, is upside down…presenting terrific opportunities for tenants to achieve wonders through meticulously planned and heavily negotiated deal-making. Rents are already cheaper than in 1982, the year we started in the business. While Rome is burning, protect yourself on the downside but lock in long-term rental rates.”
In the Press Room, The Registry Commercial Market Report
Reporter John McCloud’s coverage on the commercial real estate situation brought him to interview our principal, Dan Mihalovich. Excerpt from “Office Tenants Shun Tenants’ Market. Some landlords resist taking steps to entice business to commit to space”:
Dan Mihalovich, a tenant rep and principal of San Francisco-based Mihalovich Partners, believes landlords will ultimately be forced to adapt to tenant demands, though he concedes they may have to be dragged to that point. “It’s the consumer and commercial tenants who will dictate the plight of the commercial real estate markets, not building owners, no matter how much landlords paid for their buildings,” he says. “The market fundamentals will always prevail over time.”
In Mihalovich’s opinion, tenants have significantly more clout than they realize, not just now but most of the time. He considers brokers partly at fault for this, because they do not press landlords for more on behalf of the tenants. “In the 27 years I’ve been in the real estate business in San Francisco, probably 22 years have been a tenants’ market”, he says. “The exceptions were the dot-com boom and ’06 and ’07. Tenants can definitely get more than they’ve been led to believe.”
“We’re obviously going to be in a tenants’ market for the next three to five years and potentially longer. Property owners are going to have to bend at some point.”
We believe that critical thinking and sharp market analysis form the core for shrewd negotiating on behalf of our clients. Obviously we have a lot more to say on the topic—review our record of advice during the past 10 years for more. If you would like to schedule a meeting with me and our team, please contact us. Tenant representation is our sole focus.