For the first time since "new-economy" firms sent Bay Area commercial rents soaring four years ago, sputtering "dot-coms" are taking some lift out of the supercharged market.
Vacancy rates are rising. Rents are flattening or, in some areas, falling. Huge chunks of sublease space have come back onto the market. Even the seductive practice of trading rent for stock has faded. And credit, once again, is king.
"Old," as in "old economy," "is starting to look pretty good again," said Tom Poggi, a broker with San Francisco's CAC Group, a leading downtown brokerage.
Certainly, no one is pushing the panic button in what remains one of the country's strongest office markets. Even if rental rates--which are among the nation's highest at about $75 per square foot per year--were to fall 10% to 20%, most landlords would still be generating decent cash flow. And though the vacancy rate has doubled in the last three months, local brokers estimate it is still hovering at a miniscule 3% to 4% including sublet space--a figure most cities would drool over. Class A rents in downtown Los Angeles average less than $20 per square foot annually, according to CoStar Group Inc., and vacancy is close to 20% including sublet space.
Still, the dot is off the com, so to speak, and the real estate market is feeling the pinch.
"I don't think we've heard all the bad news yet," said Douglas Rosenberg, one of the city's larger developers in the tech-heavy South of Market District, known locally as SoMa. "The question is, how bad is bad, and how much will the market soften."
The list of Internet-related companies returning space to landlords or putting it up for sublease is long--and growing. Some of the biggest include Web-hosting company EGroups Inc., which never moved into the 125,000 square feet of prime downtown space it rented at 555 Market St.; Internet consultant Organic Online Inc., which has given 77,000 square feet back to its SoMa landlord; and online drugstore More.com, which is subleasing 66,000 square feet.
Several real estate firms tracking sublease space in San Francisco estimate there is close to 1 million square feet available. That represents a small, but not insignificant, portion of the nearly 65-million-square-foot overall market.
Brokers insist that although conditions are dampening, they aren't in a free fall.
