Posted by: BayAreaComRE | December 24, 2009

How does the current ‘Great Recession’ measure up to the early 90’s downturn and bust?

As predictions for the 2010 commercial real estate market proliferate, it behooves us to look at the past recessions on a regional and national scope to learn from our mistakes and understand how this “Great Recession” differs from its predecessors.

The Wall Street Journal reported Dec. 23rd on the current office market in San Francisco, highlighting the growing vacancy rates (highest in 5 years) driven by unemployment close to 10% in SF and 12% statewide, and the somewhat steady rental rates, relatively of course.

While rents dropped approximately 26% since its peak in 2007, the boom to bust lost 67% of rental rates in San Francisco. We think the rental rates have leveled out and nearing the bottom, even if vacancies continue to slide. Landlord’s who have a low basis have been able to offer below market rents, but Landlords who bought their properties with a high basis cannot afford to discount spaces much more.

Vacancy rates have suffered from companies fleeing, downsizing or dissolving, but they have been tempered by no new construction, something that plagued the recession of the early 1990’s. Government legislation facilitated prodigious growth ushering in the recession two decades ago, but San Francisco has a dearth of space to build in the 20th century, even though ample lending existed.

This Great Recession has seen its new demons, in CMBS, commercial mortgage backed securities, and the influx of institutional ownership. San Francisco rental rates artificially rose in 2006-2007 due in part to institutional owners buying buildings for exorbitant prices, and SF tenants bore the cost with rates that approached $100 a square foot in some of the top tier buildings.

The predominant factor in this latest recession that continues to stymie long term deals by tenants and landlords is uncertainty. There is still fear landlords will default or walk away, like the Glenborough portfolio (see BayArea ComRE article) and 333 Bush (bought by Brookfield), companies will dissolve, like Thelen and Heller, and banks will fail, like Pacific National Bank (bought by US Bank) and United Commercial Bank (bought by East West Bank). This has begun to correct itself with buildings going back to lenders and private equity stepping in, but demand has to grow for the San Francisco Bay Area to emerge from this demand-driven recession.

See the Wall Street Journal Article

See the article from National Real Estate Investor


  1. […] dedicated to trying to predict what will happen, known as Research. We have posted a graph that shows the bottom of the market occurring seven quarters after the bottom of the stock market. But we can’t say for sure how this will […]


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