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Office landlords desperate for tenants Posted at 12:46 a.m. PDT Monday, May 7, 2001

BY KAREN DE SÁ AND MARY ANNE OSTROM, Mercury News

Want a free trip to Hawaii? A new Porsche? Just find a tenant to fill a Bay Area office. That challenge offered to real estate agents is no small feat in a region facing the most dramatic downturn in office-space demand in a decade.

As the high-tech slump expands from dot-coms to telecommunications and chip companies, the scrounge for tenants has reached new levels of desperation. In the hardest-hit areas, the vacancy rate has shot from virtually zero to 15 percent in a mere 12 months.

Last year, the dot-com invasion spawned protest rallies and calls for city moratoriums on ``Internet-based businesses.'' Today, landlords are offering a year's free rent to prospective tenants and lavish gifts to the agents who snag them. There's a $100 Nordstrom gift certificate just to arrange a showing at one Bay Area building.

Texas-based Archon Group has come up with the hottest prize: a new Porsche to any listing agent who can secure a lease for its Newark property.

Downturns are nothing new in real estate; this one began gradually in the fall. But what's shocking, say developers, brokers and city officials, is the speed of the plunge in 2001. ``It was like a rocket ship going up. And it's like a rocket ship coming down,'' said broker Frank Fudem of BT Commercial Real Estate. He recently gave a lecture titled ``San Francisco Office Space: From Drought to Glut.''

Not every corner of the region is suffering. Areas less dependent on technology companies, like traditional downtowns, are less affected. And some large projects, including the Bay Meadows development in San Mateo, and new office towers in San Jose and Oakland, are moving forward.

The steep drops elsewhere are having some unexpected, but welcome, consequences. As dot-coms disappear, others are swooping in for good deals -- and moving in to fully stocked offices. ``All you have to bring is your coffee cup,'' quipped San Jose broker Mark Ritchie.

What's more, as high-tech headquarters are being put on hold or canceled, developers in Oakland, San Francisco and along the Peninsula are now talking about building houses in their place. This turn of events is delighting Bay Area planners, who only recently feared the region would become one big office park with nowhere to live.

The landmark Century 21 Theatre complex off Highway 101 in Redwood City, for example, was going to be the site of another office tower. But now, Rajiv Parikh, senior vice president of Syufy Enterprises, is reconsidering. Parikh says he wants ``to take a deeper look at other options for the site, more residential.''

Nationwide trend

Rising vacancy rates are a national trend, according to real estate giant CB Richard Ellis Services. In a report released Friday, San Jose and Oakland had some of the lowest rates in the nation -- but they are rising quickly.

Simultaneously, office rental rates are dropping. Brokers and building owners don't disclose rates on signed contracts, so it's difficult to measure that drop. The market is a far cry from a year ago. Then, a tenant seeking at least 20,000 square feet had only three dozen choices in central Bay Area counties. Today, there are almost 200 spots to choose from, according to BT Commercial Real Estate.

San Mateo County, which became a big draw for high-tech companies in recent years, has seen office vacancies surge from 0.6 percent to 9.2 percent over the past year. A typical market has a 6 percent to 9 percent vacancy rate.

Places that reinvented themselves as high-tech havens, such as Redwood City and Mountain View, now have vacancy rates of 15 percent. South of Market's Multimedia Gulch, once ground zero for emerging dot-coms in San Francisco, is searching for a new identity as vacancy rates reach 20 percent.

The drop in demand for office space started last year as investors ran out of patience with many dot-coms and cut off their cash supplies. Now a second, more devastating, wave is pounding the office market. Instead of small dot-coms leaving town, more established companies with much bigger space commitments are dumping grandiose expansion plans. They may have survived, only to see their stock values driven down as much as 90 percent, forcing layoffs and reconsideration of lavish new facilities.

Palm postponed plans for a 1-million-square-foot headquarters in North San Jose. Charles Schwab has stopped transferring employees to its new Pleasanton campus and is reconsidering the entire project's future. Cisco Systems is just putting up walls on its Alviso buildings, leaving the insides unfinished. ``Digital Dublin,'' where some of tech's biggest names planned to build 4 million square feet, is entirely on hold -- except for one company, Sybase.

Large office deals also are being restructured. One South Market, a proposed office building at the corner of Market and Santa Clara streets in San Jose, had hoped to and a tenant to help finance construction. Now that's unlikely. ``There's more caution now,'' said Mark Russell of CB Richard Ellis, the property's listing agent.

Sublease increase

Meanwhile, the sublease market is soaring. In fatter times, companies like Excite@Home and BroadVision leased buildings in a new 1.7-million-square-foot Redwood City office park. Now, they don't have the money to move to Pacific Shores and aren't easily finding replacement tenants.

Pacific Shores, the largest office park now under construction in Northern California, is nearing completion -- two years ahead of schedule because demand had been so high for the prime bay-front property. But despite bocce courts, shoreline jogging trails, Olympic-size pool and an outdoor amphitheater, many of its 10 towers stand empty.

Yahoo moved into its new Sunnyvale headquarters two weeks ago, and is already scrambling to sublease at least one, and perhaps two, of its five buildings.``A lot of potential tenants are sitting on the sidelines waiting for things to shake out, waiting for the bottom,'' said Pacific Shores developer Peter Brandon of Jay Paul.

Those who have been through other ups and downs say the current office glut doesn't compare with the severe downturn that accompanied the recession of the early 1990s, which sent developers into bankruptcy and stopped city redevelopment plans in their tracks.

``Everyone had overbuilt,'' said Bill Claggett, who heads Oakland's Office of Community and Economic Development.``All the dumb money went into real estate at that time. This time, all the dumb money went into dot-coms.'' Still, Claggett and his colleagues charged with reinvigorating urban centers acknowledge even a temporary downturn can stop momentum and shift priorities.

Silver lining

But one company's woes can mean another's gain. Consider Warren Kaplan's twisted luck. At the urging of a friend, he invested in Lightsocket.com, an Internet services company in San Jose that flopped. His fortunes flipped, however, when he learned he could take over Lightsocket's downtown office for his own growing concern, Spacedisk, at about 30 percent under market-rate rents. Kaplan assumed the lease, the furniture and``everything from the paper clips to the potato chips.''

Contact Karen de Sá at kdesa@sjmercury.com or (650) 366-0174.

-- Swissrose (cellier3@mindspring.com), May 07, 2001