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SAN FRANCISCO-Overall San Francisco office market vacancy increased 60 basis points to 13.2% from 12.6% at the start of the year, according to Colliers International. Studley, another brokerage firm, pegs overall vacancy at 18.2%, up 170 basis points from 16.5% at the start of the year.

Despite the huge gap in their vacancy numbers both firms agree that overall leasing activity and class A asking rents are down significantly from a year ago due in part to a lack of activity and stiff competition from sublease availabilities. Moreover, anecdotal information from local brokers show sublease space being offered at a 25% to 50% discount to average direct asking rates.

Studley data show leasing activity—5.4 million square feet over the past four quarters—is down 29% from one year ago. Its data on average class A asking rents show a 25.3% from one year ago to $34.74, which includes a 30% decline in the North Financial District (was $49.71, now $35.16) and a 20% decline in the South Financial District (was $44.35 now $35.17).

Colliers data show the weighted average class A rental rate has fallen 24% from a year ago to $38.80 from $50.92.While Colliers’ report doesn’t show total leasing activity, it does show the office market gave back a net of 553,825 square feet of space during the first three months of 2009 on the heels of giving back 766,464 square feet in the final three months of 2008.

Colliers 553,825 square feet of negative absorption does not include a nearly equal amount of space that is in the process of being handed back by Charles Schwab (375,000 square feet at 120 Kearney in North Financial District) and Macy’s (150,000 square feet at 224th in Yerba Buena). Studley’s numbers, which do include those givebacks, finds that one million square feet of sublease space has come to market since the start of the year, with 87% of it in the Financial District and 76% of it in spaces greater than 10,000 square feet. In addition to Schwab and Macy’s, PG&E vacated 80,000 square feet at 123 Mission St. Both reports are believed to take into account 220,000 square feet of Heller Ehrman sublease space at 333 Bush that recently went direct due to lease expiration.

“Tenants, especially those in finance or mortgage-related businesses, are consolidating or shutting down,” according to a 2009 national office forecast by Susan Persin of Foresight Analytics, a locally based company that provides national real estate analysis and projections. “As demand for office space decreases, both direct and sublease availabilities are growing, and net new leasing activity is down. The result is higher availability and some of the worst office market fundamentals since the dot.com bust.”

Countering analysts claiming that office markets are not in jeopardy because markets are not overbuilt or because planned projects have been delayed or canceled, Persin argues that the US is facing unprecedented job losses in sectors that occupy office space. The nation lost an estimated 900,000 office jobs during 2008 and is set to experience a deeper decline of 1.2 million to 1.5 million office jobs during 2009. Indeed, Foresight is forecasting that the greatest impacts to the office market from job losses and new construction is still to come in 2009 and 2010.

“Lost jobs will have the greatest impact in metro areas like New York, with a significant financial base, as well as Southern California, some parts of Florida, and Phoenix, which are among the areas most impacted by the housing market downturn,” Persin says. “Although these areas will be hardest hit, it is important to note that job losses are having a widespread impact across every market in the nation, as opposed to the early 1990s, when job losses were more localized. Lost jobs will result not only in a lack of new demand, but also in significant give-backs of currently leased office space in markets around the nation.”

Investment activity remains dormant, according to Colliers, which says the only notable sale year-to-date was 717 Battery St., also known as Musto Plaza. The building was acquired for approximately $14 million by Michael & Xochiltzin Birch. Current approvals for the property allow for a 40,000 square feet addition to the existing RBA, for a total of 70,000 square feet of office space. The building previously traded hands in late 2007 for approximately $10.3 million, according to Colliers.

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