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S.F. commercial real estate prices to dip

The commercial real estate market in the San Francisco Bay Area will continue to suffer, a study says, leading to higher vacancy rates and lower rents.

The dot-com downturn is starting to hit the real estate market in the San Francisco Bay Area, leading to higher vacancy rates and declining commercial rents, according to a new study.

Released Tuesday by real estate firm Cushman & Wakefield, the study projects that vacancy rates in California's Silicon Valley and in the dot-com inundated areas of San Francisco will jump to about 20 percent by 2002. Meanwhile, the study projects that commercial rents will fall by more than 20 percent in both Silicon Valley and parts of San Francisco by 2004 from their peaks of last fall.

The study blames the rise in vacancies and the fall in rents in part on the shrinking work forces of dot-com and technology companies. Additionally, developers looking to cash in on the now-past dot-com boom are building dozens of office buildings in the area that will open during the next three years.

"The recent and future cooling of the San Francisco and Silicon Valley office markets can be attributed to a great extent to changing economic trends among high-technology industries," the report said. "Cushman & Wakefield's outlook is for a correction in the office market."

Representatives for New York-based Cushman & Wakefield did not immediately return calls seeking comment.

In March, Rosen Consulting Group released a study based on Cushman & Wakefield's data that projected that 80 percent of the remaining Internet companies in the Bay Area would close shop in the next year. Rosen also projected that there is a 70 percent chance that a full recession will hit the Bay Area.

Cushman & Wakefield representatives said at the time that they disagreed with Rosen's conclusions.

According to Cushman & Wakefield's report, vacancy rates in San Francisco and Silicon Valley have already begun to jump from their historic lows of less than 5 percent in early 2000. Vacancies outside of San Francisco's central business district have already hit 10.2 percent and Cushman & Wakefield projects they will peak at 19.7 percent in late 2002.

Silicon Valley--which in the report includes San Mateo County; San Jose, California; Santa Clara County and parts of Alameda County--has also seen vacancy rates top 10 percent, according to the report. Vacancies will reach 20.4 percent in Silicon Valley by late 2002, the report projects.

As vacancies have gone up, rents have fallen and will continue to fall, according to the report. In the areas of San Francisco outside of its central business district, including the so-called Multimedia Gulch area, rents fell in the first quarter of this year by 12 percent to $54.84 per square foot, according to the report. Cushman & Wakefield projects that rents will continue to fall in the area through the end of 2003 and will stabilize in the high $40 per square foot range.

In Silicon Valley, rents fell 7.5 percent in the first quarter to $65.38 per square foot, according to the report. Rents will fall to $50.69 per square foot by the end of 2003, Cushman & Wakefield forecasts.

Despite the projected decline in rents, the company noted that rents in San Francisco and Silicon Valley in 2003 will still be above their 1998 levels because of the huge increase in rental rates in 1999 and 2000.