Commercial Real Estate Blog

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Faced with a possible downturn in the economy, tenants seeking space in San Francisco returned to the sidelines in the fourth quarter. 2007 saw a number of large deals take place including 200K for Google and 170K for O’Melveny & Myers. Rents also saw an uptick in 2007 overall, but that trend seemed to have stalled in the fourth quarter as tenants seemed to begin questioning whether the economy had the legs to support the demands of landlords.

As new landlords have moved into the San Francisco office market over the past few years, there has been a rapid push to raise rents and lower tenant improvements and concessions as the economy recovered and financial district vacancy dipped below 10%. Now that there is some doubt about the economy, tenants have pulled back until there is more visibility in the market while landlords are also seemingly on the sidelines about making concessions.

Uncertainty coupled with troubles facing the financial market has caused a significant slow down in demand for space in the financial district. There is approximately 1M square feet of new office development coming online in the city this year which has not been pre-leased. The additional supply, possible uptick in sublease space available could finally put the pressure on landlords in the second half of 2008.

We previously wrote a short piece on Vietnam Town’s troubles back in November about the work stoppage at the site and the lender halting payments.

It seems financial problems continue to affect the development now that some of the sub-contractors have filed to seek foreclosure of the site to satisfy monies they are owed for work.

There is no indication as to what exactly the issue is with the development, but a number of parties have not been paid and to date only one of those has filed to seek foreclosure. TWN Investments also represents some of the investors in the Vallco Mall project which has seen its own share of problems. Vallco has recently gone through a restructuring seeing some of the assets being sold to Orbit Resources and Fred Chan.

Microsoft has launched a $45B unsolicited bid for Yahoo! Combined, the two would be a more formidable competitor to Google, both in terms of search market share, as well as ad inventory. What will be interesting to see is that if the acquisition is indeed successful, to what extend Microsoft will embrace open-source technologies and how it integrates the two companies.

From a real estate perspective, in Silicon Valley, Microsoft may elect to keep things seperate but also has the option of utilizing Yahoo!’s 50-acre campus site in Santa Clara it purchased two years ago to combine operations. Yahoo! is currently leasing most of its Santa Clara facilities on leases which expire roughly 2-3 years from now. Given the current job cuts and overall woes with the company however, it is unlikely that they would break ground on a new campus anytime soon. Microsoft recently renegotiated for a longer term on its 450,000 SF Mountain View campus.

Also today, Kara Swisher revealed financials from Facebook based on a company-wide conference call held by Mark Zuckerberg. Some numbers are below:

• 2007 Revenues: $150 million
• 2008 Revenues: $300 to $350 million (projected)
• 2007 Headcount: 450
• 2008 Headcount: 1,000 (projected)
• 2008 Capital Expenditures: $200 million (i.e., servers)
• 2008 EBITDA: $50 million
• 2008 Cash Flow (EBITDA - CapEx): negative 150 million.

Based on the above, it would indicate that Facebook will likely be out in the market very soon looking for at least 100,000 SF of space. They are also hiring an executive chef which implies that they are emulating Google in many regards and it will likely push their requirement north of 100,000 into the 200,000-250,000 SF territory to accomodate growth simply beyond the 2008 mark.