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Winners and losers: S.F.'s vacancy net ensnares some top landlords
By Steve Ginsberg - San Francisco Business Times
January 17, 2003 - Although San Francisco's vacancy rates ended 2002 above 20 percent, some Class A building landlords are faring better than others.
Shorenstein, Boston Properties and Hines are all weathering the continuing swoon relatively well, enjoying vacancy rates well below the city's overall rate, according to estimates by major brokerages. However, figures for other landlords, including Tishman Speyer, SKS Investments and Equity Office Properties, show vacancies well above the city's average level.
 The Business Times asked several leading brokerages to crunch the fourth quarter vacancy statistics to independently assess who were the winners and losers coming out of 2002. These landlords represent over 25 million square feet of space and collectively had over 24 percent vacancy in their buildings, on both a direct and sublease basis-reflecting the overall plight of San Francisco. (Since each brokerage uses its own method, numbers reflect a range of vacancy estimates.)
Not surprisingly, today's winners were largely yesterday's winners. Landlords with the best buildings and most creditworthy tenants in 1990s are more than holding their own now, because they held onto enough law and financial services firms to keep their buildings mostly filled. Their exposure to the dot-com and corporate governance debacles was limited.
With over 6 million square feet, a direct vacancy of about 5.6 percent and little sublease space, Shorenstein came out of 2002 in comparatively good shape with a total vacancy in the range of 7.5 to 11.5 percent.
Hines also did well. Though it sports an overall vacancy rate of about 20 percent, on a direct basis barely 5 percent of its 3-million-squre-foot portfolio is vacant. Boston Properties did the best for the publicly traded landlords with vacancy well under 10 percent at its Embarcadero Center flagship.
Conversely, Tishman Speyer was much less fortunate with direct vacancy rate over 80 percent at its two-building portfolio on Market Street. Tishman bought its buildings at the height of the market and leased them primarily to high-tech startups that failed.
Tishman is now before the city's planning commission trying to convert a sizable portion of its buildings at 575 Market St., between First and Second streets, to residences.
South of Market was hit especially hard and that is reflected in brokerage estimates of SKS investments' total vacancy range at 39.2 to 46.2 percent.
History repeats
Decisions made in the late 1990s are reflected in today's numbers. Landlords who filled their buildings with tech startups or who built or bought in the midst of dot-com mania are feeling the recession a lot more than those that didn't.
"We didn't have much exposure to the dot-coms by design and did a lot of deals with Wells Fargo, Providian and Aviso. We could have gotten higher rent with the dot-coms," said Charles Malet, director of leasing at Shorenstein. "We have good buildings and also a nimbleness. Our competition was slower to react to falling rents. The name of the game is keeping your building leased."
Rents are now at the "breaking point" and are slipping below profit levels for some landlords, according to Colliers International market research director Brad Van Blois, who expects more leasing activity this year as tenants seek to take advantage of depressed rents. Colliers was among the brokerages that contributed statistical information for this story.
Private vs. public
Shorenstein and Hines are privately held and have more flexibility on rents than publicly traded Equity Office Properties, which has quarterly numbers to beat on Wall Street. EOP in its 15 buildings has vacancy in excess of 30 percent on a combined direct and subleases basis, according to the brokerage estimates. Its new projects at Foundry Square and the Ferry Building have come onto the market at the worst possible time.
"Timing has so much to do with it," said Grubb & Ellis research director Colin Yasukochi. "Rents escalated and traditional tenants got displaced by the dot-coms. What appeared to be good timing has turned out to be bad timing today."
G&E reported 2002 ended in San Francisco with a historically high 23 percent vacancy with rents falling to a six-year low at $29.44 per square foot. That, perversely, is offering developers encouragement that things won't get worse.
"It has bottomed out. There are lots of small tenants taking space and looking to lock in the lower rents. That's in contrast to last year at this time when nothing was happening," said landlord Greg Flynn of Flynn Land Co. His vacancy on a direct basis is down to 7 percent, he said, but nearly 30 percent on a subleases basis.
"The story was simply, the best properties had the quality tenants and got great rents. The rest of us got great rents from poor tenants and they disappeared."
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