Insights

You probably remember the story about the little girl that gets lost in the forest and finally spots a friendly-looking cottage. The three bears living there were out, while their porridge cooled. Goldilocks entered the cottage, ate the porridge, broke a chair and tried out the Three Bears’ beds. She sat down on Papa Bear’s bed but she found it “TOO HIGH”; Mama Bear’s bed was “TOO LOW” and the Baby Bear’s bed was “JUST RIGHT”.

Is this an analogy for our current leasing market? In 2014, the modern Goldilocks, trying to find affordable space, would discover that San Francisco’s Class A rents are “TOO HIGH” ($60); the rents in San Ramon were “TOO FAR” ($28) and the rents in Oakland/Walnut Creek are “JUST RIGHT”($36), for some tenants.

Many tenants today are facing the daunting task of renewing their leases. Back in 2009, when their leases were commencing, the market was plunging in the face of the “Credit Crisis”. Now they are facing a 50%-increase in most sub-markets in San Francisco. For many firms that is “TOO HIGH”!

Back in 1982, Bishop Ranch in San Ramon lured two of our major corporations, Chevron and Pacific Bell, to leave San Francisco to build there. Bishop Ranch is now roughly seven million square feet of buildings with Robert Half International and Bank of the West having large “back-office operations” located there. BART runs trains to Pleasanton where many riders transfer to the Bishop Ranch fleet of modern buses.  For Fortune 500 companies like PG&E and General Electric, having major operations there, is just fine; for others, it can be “TOO FAR”!

That leaves Oakland and Walnut Creek in the middle of the two extremes. In past cycles, when rents got too expensive in San Francisco, several major corporations left. For example, in 2000, CSE Insurance sold their 100,000-sq.ft. building at 6th & Market and relocated to Walnut Creek. They were followed in 2002 by PMI Insurance, which erected a 190,000-sq.ft. office structure in Walnut Creek;  and, in 2009, AAA Insurance sold their multi-building complex in S.F. and built a 250,000-sq.ft. Walnut Creek headquarters near the Pleasant Hill BART Station. The Class A rents could be “JUST RIGHT” at an average of $36/sq.ft./year.

Back in San Francisco, in the current business cycle, we haven’t experienced major corporate losses to the East Bay. The exception is Gordon & Rees, a major S.F. law firm, who removed 20,000-sq.ft. from their 90,000-sq.ft. offices at 275 Battery and transferred it to Oakland, reducing their rent by an estimated $25/sq.ft. (Most of the square footage contains support staff, but there are also some attorneys, practicing intellectual property law.)

So, what should we expect? Many S.F. tenants won’t move because they want to remain in physical proximity to valued clients and/ or for the educated labor supply. However, there is still some appeal to reducing Class A asking rents from $55-60/year to $32-38/year in the East Bay. Many homeowners or apartment dwellers in the East Bay would also welcome reduced commute time and reduced reliance on BART.

Ultimately, when it comes down to considering the alternatives to remain in S.F. versus enhanced profits, be sure to take the “JUST RIGHT” choice for you! Many S.F. tenants feel that they have no choice but to “tough it out” in San Francisco. In that event, follow the advice at the end of the story: “Goldilocks was so happy to see her mother (read “stakeholders”) that she promised to never wander through the forest alone again”.

Don’t go it alone: give me a call to explore your options today!

Bill Wilson – 415.268.2229