Vacancy rates continued to set record highs, rising to 22% citywide and 20.3% in the CBD, where full-service rates fell another 3.8% to $30.60 per sf. The rise in vacancy was fueled by the delivery of about 300,000 sf of vacant new office space, according to the report.
Mark McGranahan, a senior director of office leasing with C&W, says the good news is "class A direct view space is still scarce and commands a significant premium over commodity space." Everywhere else, however, the situation continues to give tenants the opportunity to upgrade, renegotiate or renew at lower rents. "While unreasonable and unprofitable tenant demands are not going to be embraced by landlords, thoughtful requests based on realistic alternatives will meet with positive renewal or restructure results," says Dick Robinson, another senior director of office leasing with C&W.
The investment side is also lackluster. There has been no major investment sales in San Francisco so far this year unlike other major markets, though several owners have decided it is time to begin marketing their San Francisco properties.
Jeff Congdon, executive director of C&W's Financial Services Group, predicts investment activity will pick up soon. A large amount of capital has been on the sidelines due to a difference of opinion between buyers and sellers about where rents will be in the coming years, but that should soon change, says Congdon.
"Buyers and sellers can agree as to where the market is today but need to develop a mutual sense of where the market will be in four to five years, which is where the professional intermediaries come in," says Congdon. "We anticipate the expectations of buyers and sellers will move closer together over the next 12 months, and clarity with respect to war, terrorism and the economy will accelerate this process dramatically."
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