The Bay Area Office Market and the Tech Slowdown

The San Francisco and Silicon Valley real estate markets have experienced unparalleled growth in rents and values during the last five years as venture funding has escalated and Internet and high-tech firms have multiplied. A survey indicates that a substantial portion of recent demand has come from high-risk on-line and medium-risk high-tech companies; in excess of 50 percent of leases signed have involved web firms. Traditional off-line businesses are slowing their growth in the region, even planning to relocate because of high costs and difficulties in attracting and retaining employees. An infusion of billions of dollars of both venture and IPO capital, juxtaposed against nearly no new construction had created a rush-for-real-estate environment. Growth in rents will slow and potentially reverse direction as the tolerance for risk and lack of profits diminishes and new supply satiates demand. These conditions are not sustainable, and it appears that there will be a steady correction in which rents decline 15-20 percent and vacancy rates rise 6-7 percent in Silicon Valley and 7-8 percent in San Francisco by 2005.