Rental rates for commercial space are still declining and bargains for tenants remain plentiful. Real estate values have crumbled anywhere from 25-40%, but it does not appear a mass exodus has occurred at the investor level. Are we at the bottom? Who knows, but U.S. unemployment rates are holding near the 10% mark. Will it increase or decrease? That’s the million-dollar question and what drives commercial real estate. A well known fact is that commercial real estate lags behind the residential market anywhere from 9-12 months. Most analysts believe that the residential real estate market is bouncing off the bottom. Therefore, based on this pattern, users of commercial space should expect a tenant friendly market during next 12-18 months. Even if rental rates do tick upward, there is still great value when compared to all time highs. While it’s impossible to tell when the pendulum will shift, let’s view a snapshot over the past ten years:

Where We Were


During the late 1990’s and early 2000’s venture money was flowing. Companies were doubling and tripling their headcount and taking down large blocks of space. Rental rates soared, landlords rented space to those who paid top dollar, and new real estate product could not hit the market fast enough. Then the tech wreck occurred, companies went under and gobs of space hit the market. Over the next several years as the technology sector slowly recovered, the capital markets were driven by low interest rates which made property values boil over. Office building values in San Diego went from $300 per SF to $700 per SF. Occupancy rates and rental income were a thing of the past. Buildings were worth more vacant than occupied as investment pro-forma’s were grossly understating projected future rental rates. Then the credit bubble popped in late 2006. Residential property values tanked followed by the commercial sector as companies started to downsize and dispose of excess space.

Where We Are Now


We’ve all been waiting for the other shoe to drop on the commercial side. Some real estate investors have walked from their buildings, but not as many as predicted. Probably for a couple of reasons. First, landlords are not as leveraged compared with the last recession and second banks are modifying near term debt maturations with short term loan extensions. In other words “extend and pretend.” In turn, Landlords are now adamant about occupancy rates. Buildings are slowly becoming stabilized by occupants as published rental rates typically have substantial negotiating room, in addition to free rent and other concessions in order to secure rent payers.

Where We Will Be


Commercial real estate activity in 2011 will remain similar to 2010 with the exception that concessions for tenants may continue to flatten out for some of the Class A properties and the Class B properties will realistically be the best deals in town as companies continue to upgrade their space. Year 2013 will commence the stabilization of the leasing market continuing into 2014. Concessions for tenants will start to slow as rental rates inch upward and supply and demand nears equilibrium. However, it could take until 2014 to 2015 for the tides to shift.

While it is impossible to predict the future, looking back at where we were and where we are now with rental rates and property values nearly cut in half, it does not take a rocket scientist to understand that it’s a buyer’s market. How long will it remain? Who knows, but those who are currently in the market for space or those who are renewing their lease will certainly reap the rewards of today’s value pricing for at least the next 12 to 18 months.