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S.F. Office Rents Drop to '92 Level

Inflation-adjusted rates, rise in expenses suggest landlords may be hurting more than previously thought.

March 12, 2003|From Bloomberg News

San Francisco office rents have fallen to 1992 levels when adjusted for inflation, a more precipitous drop than just a return to pre-Internet boom days, property broker Cushman & Wakefield said Tuesday.

The rent for top-tier office space downtown is $30.84 a square foot, little changed from the $30.88 of 11 years ago when expressed in today's dollars, Cushman said. Included in the numbers are property taxes and expenses involved in the operating of properties, such as utilities and maintenance. Those expenses have risen 50%, to about $15 a square foot.

Inflation-adjusted rents, coupled with the increase in expenses, indicate San Francisco landlords may be hurting more than previously thought after rents tumbled from a peak of $84.60 in 2000. When not adjusting for inflation, rents are above 1997 levels.

"We've fallen a lot more than we think we have," said Meade Boutwell, a senior director at Cushman in San Francisco.

San Francisco's biggest office landlords include Shorenstein Co., Equity Office Properties Trust, Boston Properties Inc. and Hines Interests. Catellus Development Corp. is building the $4-billion Mission Bay office and housing project.

At the same time rents are down and expenses are up, landlords are having to pay more for improving tenants' spaces for occupancy and doubling brokers' commissions, said Douglas Rosenberg, chief executive of developer Rosenberg Hood Ventures.

The company recently completed leasing a 160,000-square-foot building it developed across from Pacific Bell Park. "We made the decision you're better off biting the bullet, paying the money and getting the building leased," he said. "I'm not going to tell you we're thrilled with the rents we got."

Not accounting for inflation, San Francisco rents are up 39% from 1992, though still below the peak.

Some tenants are taking advantage, including law firm Orrick, Herrington & Sutcliffe, which last week leased the top four floors of a new office building co-developed by Equity Office. Orrick Herrington partner Michael McAndrews said the firm was "extremely pleased with the rental rate and economic package we got," though declined to specify the amount.

Inflation-adjusted rents in Manhattan, Boston and Chicago, where the tech boom wasn't as significant, haven't fallen as much as in San Francisco, returning to 1998-99 levels, Cushman said.

Also driving down San Francisco's rents is new construction, said Maria Sicola, Cushman's senior managing director of research. About 2.8 million square feet have been added to the supply since 1999. About 15 million square feet are vacant in the city. The vacancy rate is a record 23%, according to Grubb & Ellis Co.

Rents "had an artificial peak, overly exaggerated by what was happening in the market," Sicola said. "The bigger they are, the harder they fall."

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