Absorption: The office market recorded its second consecutive quarter of negative absorption in the last 21 quarters. There is the very strong expectation that this trend will continue the next few quarters.

Vacancy: CBD overall vacancy rose for the second quarter in a row to 9.9%, a 1.1% increase. Class A vacancies also rose an average of .75% in the CBD's and Citywide. This trend is expected to continue to increase as the failures in the securities market, insurance and the investment banking industries will result in 400,000 to 600,000 sf of sublease space being dumped on the market within the next year.

Rent: CBD and Class A Direct Asking Rents fell for the first time in four years in CBD. Class A rates fell 2.2%. The growth rate of sublease space (estimated to be 20+% of all available space) and newly completed construction/renovation projects will flood the market in a period of weakening demand. This will serve to drive rents down and further strengthen the hands of tenants.

Activity: Leasing activity will continue to moderate as tenants seek shorter-term solutions in these unprecedented times of great uncertainty. Financing continues to hamper sales activity. Absent a compelling reason(s), tenants/investors and other real estate decision makers will tend to "wait it out."

Forecast: While San Francisco and most parts of the Bay Area will fare better than their national counterparts, the credit crunch and the probability of the national economy weakening further before stabilizing, projects more downward pressure on the office market, i.e. lower rents and higher vacancies. It will be a time for bargain hunting and general conservatism. Clearly, the next 12-18 months will be a challenging time in the San Francisco office market.

Mike Tobin
Director
Pacific Union Commercial Brokerage
October 15, 2008