"We'll continue to see the market in a slow downward trend for the next six to 12 months, because there is a glut of space and little demand," says Mark McGranahan, a senior director with C&W. "In the last three to four years there was approximately five million new square feet in construction, and a lot of demand for that was all tech demand, or it was service sector demand that has dried up," he adds.
As a result, the commercial real estate market crashed, with downtown office rental rates dropping 57%. At the end of 2000 landlords were demanding an average of $80 psf. Today, C&W found that the average rate is $34 psf. Rental rates have not been this low since 1996, when rents averaged $29 psf.
According to C&W analysts, "San Francisco's economy is in neutral, giving little hope it can fill empty downtown office space built on the expectation that the Internet boom of the 1990s would last."
With soaring vacancy rates and weak demand, rents are continuing to collapse and owners are fighting for tenants. C&W says that while prospective tenants sought 2.5 million sf of office space, more than 15.1 million sf was available in the second quarter.According to real estate experts, this creates opportunities to purchase owner-user and investment properties at lower interest rates. This can be an attractive incentive for companies considering making the switch for tenant to owner.
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