"The office market ended 2002 with a sigh of relief that its two-year slide may soon come to an end. However, vacancy increased by over 400 basis points to reach a historical high of 23% and lease rents fell by 20% to a six-year low of $29.44 per sf for Class A and $21.33 per sf for Class B," says Colin Yasukochi, research director of Grubb & Ellis San Francisco. Yasukochi says certain market indicators suggest a plateau, with tenant leasing activity increasing. He notes that this is a precursor to turning demand positive.

The report reveals that in 2002 San Francisco saw a significant deceleration in the rate of increase in vacancy, rate of decrease in lease rents and amount of negative net absorption. Tenant leasing activity increased by 12% to 5.5 million-sf and Class A buildings captured nearly 80% of total activity, considerably higher than the 70% of total inventory it represents.

However, Grubb & Ellis points out that there will be many obstacles in the market's road to recovery, including the absence of positive job growth. Once this obstacle is overcome, the widespread condition of underutilized space will delay the need for additional space, and memories of past sublease space problems could dampen expansion plans.