Overall, the San Francisco office leasing market continues to soften, according to a report from Colin Yasukochi of Grubb & Ellis, but the decline has slowed. Downtown class A rents are down 3.77% to $69.19 per sf and class B rents are down 5.66% to $55.41 per sf. Vacancy is 17% higher and rents are nearly 30% lower in the dot-com heavy area south of Market Street.

The vacancy rate jump north of Market Street, which added a full percentage point last week, is a "harbinger of things to come," says McComb. The class B market, comprised of buildings built before 1960, is a leading indicator of the future of market rents because they provide an acceptable alternative to class A buildings at more affordable rents. The market doesn't tolerate an 11% to 13% vacancy rate for more than a few months before property owners are forced to make concessions.

The vacancy rate had been at zero during November and December of last year, says McComb, and shot up to 11% in a couple of months mainly due to the "dot-com shakeout" and a migration due to high rents of mid-level businesses into their areas. Rental rates shoot up fast when the vacancy rate is below 5%, says McComb, because most properties operate with an expected occupancy level of 95%.