SAN FRANCISCO-While vacancy rates have risen dramatically across the country, office suites under 4,000 square feet are becoming scarce, according to a report by Han Hansson of Starboard Commercial Real Estate. Despite a city-wide overall vacancy rate of 20%, the vacancy rate for Downtown spaces under 4,000 sf is a relatively tight 7.64%, according to the report.

“Unlike the over-building years of the 80¹s that was not based on actual need but on tax advantages and liberal loan availabilities, the 1998-2000 office expansion was based almost exclusively on the needs the expanding tech sector,” says Hansson. “This sector required large suites of 10,000 square feet or more to accommodate their dreams of being the next Microsoft.”

Alas, most of their dreams were not met, says Hansson, leaving landlords to face high vacancies in spaces that do not fit the current needs of users and are not inexpensively or quickly convertible. As a result, rental rates are way off. Today, the average rental rate stands at $31.00 per sf, where it was before the dot-com boom began.

The shrinking of the small-space pool has been occurring since August, when smaller but still profitable space users began taking advantage of the market, bargaining for square feet at 1998 prices, says the report. It’s that rush that has good small space now more difficult to find.

“In the last several weeks, I have had to compete for my clients against multiple offers for the same suite similar to the days,” says Hansson. “So far this competition has been won strictly based upon the financial strength of the tenants and the limited scope of tenant improvements required, not price.”

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