"The San Francisco office market deteriorated further during the first quarter of 2002, but the bottom of the market may now be in sight," says Colin Yasukochi, Research Director. "Businesses continued to shed excess office space during the first three months of 2002, resulting in nearly 925,000 sf of negative net absorption. This pushed vacancy to a new high of 21% and put downward pressure on lease rates, which fell approximately 11% to $33.53 for class A and $23.77 for class B when compared to the 4Q 2001."
According to the report, gross leasing activity in 1Q 2002 was only 800,000 sf, nearly 40% lower than the 2001 and 65% lower than the 2000 quarterly average. The average transaction size fell from 8,800 sf in 2001 to 7,100 sf in 1Q 2002, reflecting the absence of large tenants in the market.
However, Yasukochi notes, "Should the economy stabilize and show signs of improvement during the second half of the year, as is widely expected, vacancy is projected to effectively peak along with the emptying of the supply pipeline at year-end."
As discussed in the past, this does not mean the market will return to good health shortly thereafter. Sustained employment growth will be needed to absorb more than 10 years of supply. Look for higher vacancies and lower rents to hit building owners' bottom line even harder in 2002, after more than 18 months of decline.
Grubb & Ellis also released 1Q 2002 statistics on the Silicon Valley, San Mateo and Oakland office markets. Vacancy was 17.6% in Silicon Valley, 25.6% in San Mateo and 13.8% in Oakland. class A and B lease rents were $38 and $30 in Silicon Valley, $30 and $25 in San Mateo, and $31 and $23 in Oakland, respectively.
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