12/01/2001

Downturn in San Francisco Leaves Office Glut

 

SAN FRANCISCO (Reuters) - At the height of the Internet frenzy in 1999, landlord Ronaldo Cianciarulo cleared long-time tenants out of his landmark building in San Francisco's South of Market district and converted it to sleek offices that could attract high-rent, high-tech firms.

But for more than six months now, two of the three floors of the 210,000 square-foot Baker Hamilton Building have stood empty, a casualty of the bust in technology investment that helped drag the U.S. economy into recession.

Two years ago, South of Market with its abundance of converted warehouses was the hippest business address in the country for the Internet entrepreneurs at the epicenter of the New Economy.

But today the area, SOMA in the local vernacular, is ``a colossal blood bath'' in the words of Jim Collins, a commercial real estate broker at Shorenstein Realty Services in San Francisco. The most common sight is a ``For Lease'' sign.

One of the most glaring signs of the weakening economy is a glut of commercial office space accumulating with alarming speed and dragging down prices in once-booming, high-tech markets like San Francisco, Seattle and Portland, Ore.

``The effects in commercial real estate markets have been startling,'' Federal Reserve (news - web sites) Bank of San Francisco President Robert Parry said recently.

And empty office buildings are not the only symptom of the economic malaise in the western United States. Job losses are mounting, state tax revenues are plummeting and the attacks of Sept. 11 have made everything worse, pushing out the timeline for any recovery in the crucial high-tech industry.

``Things are getting worse every single month now,'' said Mary Daly, a San Francisco Fed economist. ``We are expecting further declines in the information technology sector before we see a turnaround.''

DOWNTURN BROADENING

The San Francisco Fed, which monitors nine western states, says damage from the technology downturn is broadening out to affect transportation, warehousing, restaurants and other business travel services.

Parry said a third of the San Francisco Bay area economy depends on high tech and the number of people looking for work in the area has risen by 100,000 since the end of last year.

``The resulting losses in jobs and wealth have spilled over to other sectors and pulled the rug out from under the area's expansion,'' he said.

California, the world's sixth largest economy, has suffered disproportionately from the technology slump. It is also still reeling from a power crisis last year and faces the steepest one-year drop in tax revenues since World War Two next year.

The attacks of Sept. 11 exacerbated the region's problems by hurting the tourism and travel industries, and denting business and consumer confidence.

But the strains are most evident in commercial real estate, particularly in areas like SOMA with a high concentration of technology businesses.

HALF-PRICE SALE

Vacancy rates for office space in SOMA at the southern tip of the city are running about 30 percent or even higher, far above the 14 percent rate for San Francisco as a whole, according to real estate firms that track such data. Those are the highest levels since the last recession in 1990-91.

At the end of 1999, there was virtually no office space available in the entire city. Lease rates are now about half of what they were at the peak in late 1999 and early last year, brokers said.

``Right now it's not about price. There is no demand, no willing buyer,'' Shorenstein's Collins said of the SOMA area.

As the list of tech companies gone bust lengthens, many area buildings have suffered the same fate as Baker Hamilton.

In the early 1990s, SOMA was almost entirely warehouses and light industry. Its airy, loft-like spaces attracted artists, musicians and dance troupes in droves.

But over the past five years, as landlords came to realize they could charge four or five times the rent to tech companies, the artists were driven out.

``Landlords saw the rents the dot-coms were willing to pay and started kicking old businesses out,'' said Charles Malet, executive vice president and leasing director at Shorenstein, which manages 6.5 million square feet of offices in the city.

As a result, a large community of viable businesses were forced out of their traditional homes and had to relocate outside the city, Malet said. They are not about to come back.

Between mid-1999 and early 2000, rents in SOMA doubled, soaring as high as $90 a square foot per month in some areas. Landlords began acting like venture capitalists, evaluating the viability of potential renters' businesses and, in some cases, even asking for stakes in the companies they leased to. At its height, about 80 percent of SOMA was taken up by high-tech firms.

HARD TIMES FOR ALL

Even as the downturn took hold, landlords and brokers thought top-tier buildings like Baker Hamilton would still fare well. But that was not case.

The 1905 timber structure with red-brick facade had all the character of a first-rate conversion of an industrial space -- skylights, exposed wood beams, vaulted ceiling and light. For years, it had been a bazaar for antiques, furniture and art.

But after the conversion, the landlord leased the entire building to Internet consulting firm Organic Inc. for $40 a square foot, said Edward Grammens, a senior vice president at CB Richard Ellis and the broker who represented Organic in the lease.

Earlier this year, the company began cutting costs and staff and had to give up two-thirds of the space, Grammens said. The two empty floors on the market for more than six months are now priced in the low $20s.

DIFFERENT CITY, SAME STORY

The story of SOMA is not unique. Other high-tech corridors across the West like Portland's Silicon Forest, home to computer chip-making giant Intel, are also hurting.

In the Portland suburb of Hillsboro where Intel has its headquarters and 150-200 small tech companies are clustered, almost all of the 2.5 million square feet of office space in the area was built in the last five years.

Vacancy rates have shot up to 28 percent from 3 percent six months ago. Lease rates are down 10 percent or more.

Across the street from Intel's headquarters, two office buildings owned by Sacramento-based developer Panattoni have stood empty since coming onto the market six months ago, according to Portland commercial real estate broker James Mark, chief executive officer of Melvin Mark Companies.

``This is a big hole in the market,'' Mark said of the 200,000 square feet of unused office space.

Nearby though is a hopeful sign -- five giant red cranes continue work on a new $2 billion Intel semiconductor manufacturing plant and brokers talk wistfully of a possible revival in the chip industry in the not-too-distant future that could lead the tech sector out of its troubles.

But another Intel project in Hillsboro, a $400 million research and development campus, is on hold for the time being.

via 2001 Reuters Limited.
 


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