An analysis by Rosen, a real estate and economic research firm, says vacancy rates in the South of Market area have shot up dramatically from just a few months ago. Vacancies of class B space have gone from 2.3% in late December to 16.5% now. At the same time, class B offices that rented for an average of $72.96 per sf a year ago are now going for $55.32 per sf. Rents in class A offices are down from $80.16 per sf at the end of last year to $74.16 per sf now.
In all, Rosen has predicts that four million sf of office space will pour onto the market during the next year because of dot-com flameouts. Those vacancies will be compounded with an additional six million sf of newly built and renovated offices. San Francisco already has about 70 million sf of office space.
This market isn't hurting the property owners too much, according to the report. Rents remain higher than they were a year ago and owners are getting an 8% to 10% annual return on investment.
At the same time, the turbulent market is creating opportunities for some tenants, too. According to the client services manager for the office of Grubb & Ellis here, lower rents and owners' greater willingness to divide spaces up are bringing a lot of small tenants into the market.
A report from Grubb & Ellis says class A rents are down to $69.19 per sf and class B to $55.41 per sf. Tenants may continue to wait for rates to drop further or grab a sublease at an attractive discount. The brokerage takes the position that the market will bottom out sometime in the third quarter and the vacancy rate will continue to climb but at a slower rate.
Rosen is less optimistic and predicts that 80% of the remaining dot-coms will go under or undergo severe shrinkage in the coming months, which will dump a lot more space onto the market.
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