Evaporating Tech Market Creates Office Space Surplus
ebSideStory, Inc. envisioned nearly doubling its number of workers from about 145 to 260 during 2001.
But in October, with the technology market plummeting, the Internet tracking firm withdrew its initial public offering and put expansion plans on hold.
Now the fourth floor of the company’s Sorrento Valley headquarters lies fallow.
The company has had 21,000 square feet of office space , nearly a third of the space of the entire building , on the market for six months.
“There’s a lot of supply in the market and it’s very hard to fill your space and find a good tenant,” said company controller John Burke.
The commercial real estate market has been inundated with this sublease space in the last three to four months, as the tech market has collapsed. Venture capital has nearly dried up and IPOs are almost extinct. Expansion plans are on pause; downsizing and mergers abound.
“A bunch of companies leased a bunch more space than they needed thinking they were going to hire, and now they have all this extra space,” said David Marino, executive vice president and principal for the San Diego real estate brokerage Irving Hughes.
Now that the cash supply has slowed or halted for many of the tech companies, the office space market has changed.
“So the supply of capital goes, so the demand for commercial real estate market goes,” he said.
– Space Open In Tech-Heavy Areas
There is approximately 1.6 million square feet of sublease space available in San Diego County, compared to only a couple hundred thousand square feet last year. The bulk of the space lies in the Sorrento Valley/Sorrento Mesa region and the other tech-heavy areas north of state Route 52.
Marino said 20,000 to 40,000 square feet of sublease space is hitting the market weekly in the wake of the dot-com meltdown and estimates that another 1 million square feet may be available by the end of the year.
This flood of space has turned the commercial real estate market on its head, sharply reversing the landlord’s market that thrived last year in the abundance of capital flowing into technology companies.
Those companies are dumping the space on the market at a fraction of the cost, and throwing in furniture, phone systems and other personal property to sweeten the deal.
“They’ll take 70 or 80 cents on the dollar just to stop the bleeding and make the operating costs go away,” Marino said.
Vacancy rates are rising and rents are falling.
Suddenly, there is much more supply than demand.
“Why pay a dollar for something when you can pay 75 cents for it?” said Warner Bonner, an associate at real estate brokerage CB Richard Ellis’ San Diego office. “It’s simple economics and the landlords can’t compete with that.”
– A Lot Of Space Becomes Available
Bonner represents La Jolla software company eHelp, which signed a seven-year lease in August 2000 to occupy 48,000 square feet at the Torrey View Corporate Center.
But the company recently decided not to move, as its business plan changed and more space became available in its current building.
Company spokeswoman Kim Himstreet said the space has been on the market since mid-March.
“Because there is a lot of space available, we were worried that we weren’t going to be able to fill the space,” she said.
The company is marketing the space, which covers the first two floors of the building, at a negotiable $2.60 a month per square foot. Meanwhile, the third floor of the building is being marketed by the landlord at $2.75 to $2.95 a square foot.
“Our client doesn’t want to make any money (on the space),” he said. “They just want to get rid of it.”
With the right tenant, Bonner said the company would probably take less than $2.60 per square foot.
“Some company will get a tremendous deal for that,” Bonner added.
Tom Mercer, senior vice president at Colliers International commercial real estate brokerage, represents the building’s owner, Torrey View Associates LP.
He said many sublease spaces such as eHelp’s is tailored specifically to suit the company, making it hard for a different tenant to move in. Space like that available on the third floor of the Torrey View Corporate Center will be available for an incoming company to design themselves, Mercer said.
From a landlord’s perspective, he said prices are softer but still relatively stable. And while vacancy rates have jumped from 5 percent to about 10 percent with the sublease space, he said the market is still solid.
“I don’t think it’s a tenant’s market,” Mercer added.
– Opportunities For Growing Companies
The atmosphere created by sublease space opens opportunities for companies that are still growing like Verance Corp.
The audio watermarking company is in the middle of both dumping sublease space and signing on to sublease space.
They have grown from 40 employees to more than 100 in the past year and are in the midst of subleasing out 10,000 square feet of space so they can move into a 25,000-square-foot facility in Sorrento Mesa.
“I’d rather be on the buy side,” said Verance CFO Mario Petrocco.
Landlords are more concerned about credit and are demanding larger deposits, he said, but rates are down.
“If they are a good company and they are growing, the market’s gold,” Bonner said.
Petrocco said the company will pay under $2 a square foot for the space, whereas a year ago decent spaces were available for only 60 or 70 cents higher a month per square foot.
There are other attractions for these companies to sublease space besides the price. The space can be moved into right away and the leases are often shorter.
But even if the sublease space gets picked up by a company such as Verance, even more space hits the market the following day.
“Some of these subleases are starting to move, but more are coming in as fast as the ones that are existing go away,” Marino said.
So far, sublease space hasn’t become a dominant issue Downtown or in Mission Valley.
While available sublease space is up, it isn’t nearly as high as the Sorrento region.
Because few technology companies called Downtown or Mission Valley home, the market has remained relatively tight.
But many think the effects will begin to trickle down to service industries like law firms and accountants whose clients are tech companies.
