Some Good Signs Appear in Commercial Real Estate

Jonathan Weber writes a column for The Bay Citizen

The commercial property market is an interesting economic indicator, shedding light on the overall strength of a metro economy — which segments are doing the best, and what is valued the most by job-creating businesses. The signals are mixed in the Bay Area, but they do suggest that a rebound is under way and that at least for this economic cycle, the perennial concerns that the region might be losing its edge in high-tech are unfounded.

In the South of Market district in San Francisco, the office rental market has tightened dramatically in the last six months, according to local real estate professionals, as fast-growing social media and Internet software companies snap up “creative” spaces. For all the talk about how technology enables people to work anywhere, many of these companies clearly find value in being within a few blocks of one another.

“There are pockets right now where you can’t get any space,” said Steven Ring, city leader for client solutions at Cushman & Wakefield. Rents in the heart of SoMa are up about 8 percent since early last year, according to Meade Boutwell, a senior vice president at CB Richard Ellis, though they’re still well below the peak reached in early 2008, before the global recession hit.

But so far, that strength has not bled over into traditional “Class A” high-rise space in the financial district, where rents and vacancy rates remain flat. Even brick-and-timber spaces in nearby neighborhoods like Jackson Square have yet to see much of a lift.

If the new Internet boom retains its momentum, however, service firms like law, accounting and human resources should begin absorbing some of that space. The overall vacancy rate in the city was down just a hair in the fourth quarter of 2010 from earlier in the year, to 15.5 percent, but lease rates were up for the third straight quarter.

Market watchers also point to’s recent purchase of 14 acres in the new Mission Bay development, south of SoMa and AT&T Park, as a sign of confidence. The software company plans to build a 2 million square foot headquarters campus there. Mr. Boutwell noted that tech companies now account for 30 percent of all tenant demand in the city.

In Silicon Valley, some similar dynamics are at play. Over all, the market for office space in San Mateo and Santa Clara counties has been in worse shape than the market in San Francisco. The vacancy rate in downtown San Jose, for example, is over 20 percent, and there is a glut of large vacant research and development facilities across the Valley.

But there are also hot spots. Facebook is reported to be acquiring the former Sun Microsystems campus in Menlo Park to accommodate its dramatic expansion. Apple has bought another old Hewlett-Packard facility in Cupertino. In Palo Alto, considered the most attractive office location in the Valley, vacancy rates are also dropping, thanks largely to the Internet business.

“There has been a turn this year in the commercial market,” said Doug Henton, chief executive of Collaborative Economics in San Mateo. He attributes it to the continued growth of giants like Google and Apple on the one hand, and a growing class of “microenterprises” on the other.

The East Bay is not benefiting from any tech-driven pockets of strength, according to Edward Del Beccaro, a managing director at Grubb & Ellis, and in fact is suffering from the contraction of some government entities. Nonetheless, he said his firm was hiring in anticipation of a recovery in the second half of this year — driven largely by a general economic resurgence and accompanying growth in employment.

Judging by the commercial real estate market, the biggest risk to the Bay Area economy is not that high-tech companies will move to cheaper locations; while some manufacturing activities may continue to migrate, in the Internet business, there is a huge incentive to follow the software talent and to be in close proximity to business partners and financiers. Rather, the question for the moment is whether the regional economy is too much of a one-legged stool, and vulnerable to any ebb in the social media and mobile computing tide.

If the technology business remains strong, the recovery in commercial real estate — and the economy in general — should continue apace.

Jonathan Weber is editor in chief of The Bay Citizen.

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