Hans Hansson

When I entered the commercial real estate business back in 1984, I entered the market just as it was collapsing. My very first offer that I made for a client was at $52.00 at a time when the office vacancy rates were in the low single digits. In one year the market crashed and not only rates tumbled but large blocks of space created for large institutional users were left vacant; and, floor plates that did not work for the smaller independent firms were left to make a deal during this market cycle.

Today I will receive this typical call. "There is so much office space out there we must be seeing a major drop in office prices." Yet the reality is if you are looking for less than 5,000 square feet the opposite is true. Yes rates are dropping slightly but the vacancy rate in this sector is still in the low single digits. Where vacancies are increasing the most are in full floor plates that housed financial institutional users. In order to divide these floors to meet a smaller market it is extremely expensive and also expensive to remove when the market turns positive again and these users come back to the market.

What was created was the "magic line". Landlords and sub-leasers that were stuck with larger floor plates would rent less space to tenants with the understanding that if they crossed the magic line they would then be charged for the additional space. Often this allows smaller firms time to enjoy space on higher floors to take advantage of better views and better overall identity for their firms. It also offers flexibility to allow growth without paying for office space until you need it. It also works great for allowing a firm that needs to downsize to stay in their existing space by working with the landlord and creating a magic line to save a tenant instead of losing a tenant all together.

For more ideas regarding how you can use the "magic line" or deal with your office space in a down market call us at 415-765-6900 we would be more than happy to help.

With all of the bad economic news the realty is that San Francisco is holding its own as far as commercial real estate leasing is considered. Bottom line there is plenty of tenants looking for office space and there is no sign of a let up.

Starting right after Labor Day until the first week of December it is typically one of the hottest periods in commercial real estate leasing. Tenants planning a year-end move will be out in force trying to secure their deals. Retail tenants hoping to catch the holiday season will also be out in force. Industrial and warehouse tenants looking to spend money on equipment before year end will also be out in force.

So far the office retail and industrial markets have remained pretty consistent throughout the year. Overall office vacancy rates in San Francisco continue to hold around 7% the same as in January.

For our firm we have already experienced a strong June, July and August after a weak April and May. Based upon deals in the pipeline the rest of the year is very optimistic.

The beauty of our business is that we reflect the economy in general. If people are seeking commercial space, particularly new firms, that signals good economic times.

Let the new positive economic cycle begin. It feels like a good end of the year.

As local politicians pat themselves on the back at solving the problem of providing health care of the non-insured they are turning deaf ears to local businesses that are near bankruptcy as a result of the measure.

San Francisco decided to throw the entire burden of providing health care on the backs of business. Since larger businesses already provide health care to their employees specifically this cost has fallen entirely on small businesses.

The impact one year later is starting to be nothing short of devastating. Large and small restaurants throughout the city are closing up all over town leaving neighborhoods and downtown districts with gapping signs of business failures and "for lease signs" in their windows. In addition numerous other restaurants are no longer profitable and are ready to fold. Even the most successful restaurateurs are now seeking new locations outside of San Francisco because they can no longer make it in the city.

Add the rising cost of food, a slow economy and rising fuel costs to this health care tax and you have small businesses facing an absolute no win situation. If they pass all of these costs to the consumer the consumer is simply unable to pay the price and will not buy.

An example is a recent dinner experience at one of our favorite restaurants. Typically taking out my family of four we usually ran a tab of $40-$50.00 now its $70-$80.00 for the same meal. The effect is starting to show. Where we typically would have to wait at least a half hour for a table now we can simply walk in.

Unfortunately our politicians, particularly the ones seeking higher office, are using this health care imitative more to give them a political gain then to truly look after the best interests of our city. If these businesses continue to go out of business more people will be out of work, less taxes will be paid and the overall effect of this health care initiative will be far more costly than it's worth. It's time for us all to voice our objection to this now before it is too late.

I started as a commercial real estate broker in San Francisco in 1984. My first offer I ever made was an office space at 111 Pine Street for $34.00 per square foot. My next offer was for space at 555 California Street for $52.00 per square foot. The vacancy rate at that time was six percent. Most buildings were offering paint and carpet allowance with some minor additional tenant improvements. Office buildings did not change ownership all that often back then, but when they did they traded for $150 to $200 per square foot. However in 1984 we were in the middle of an office building boo m that saw construction prices to build a new office building from the ground up hit $300 to $450.00 a square foot.

With a low vacancy rate, tax advantages favoring development and with lots of money chasing few deals and opportunities, San Francisco was in a major office building boom in the next five years leading to the 1989 earthquake. More than five million square feet of new development was either under construction or on schedule to be built during 1984.

By 1986 the market began to soften. Major companies decided that San Francisco was too expensive as a headquarter city and began moving out. Smaller regional companies began looking at new development opportunities in the East Bay that afforded them cheaper rents while enjoying larger floor plates to house more people on one floor.

By 1989 combined with the earthquake, the market crashed. By 1991 the vacancy in San Francisco hit close to 20%, and class A rental rates hit $18 to $20.00 per square foot. Tenant improvements hit $35.00 per square foot and the last of the new office buildings earmarked for the 1980's had opened representing the last Class A downtown office building that would be built in the next twenty years.

The year 2008 is now here. The average rental rates in downtown office buildings overall stand at $35.00 per square foot. Class A rents are hitting as high as $60 to $90.00 per square foot depending on how high up you are. Most buildings will offer you a paint and carpet allowance with additional minor tenant improvements to be negotiated. Office buildings are trading between $300 and $400 a foot while new construction of new office buildings is hitting $600 to $800 a square foot. Starting at the end of this year over three million new square feet are either scheduled to come online or is in planning.

And so the cycle goes....................................................................