[HPN] Property Struggle in SF -Pt V

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Sun, 9 Apr 2000 20:55:07 -0700

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Dot-com real estate crunch hits San Francisco

Updated 9:54 AM ET April 4, 2000

By Therese Poletti

SAN FRANCSICO (Reuters) - When E-Color Inc. started looking for bigger
digs as it grew out of its current 6,500-square-foot office space in the
trendy South of Market district, the San Francisco real estate market
was a whole new ball game.

Thanks to the dot-com start-up boom that is turning San Francisco into a
homogenous city of yuppie workaholics toting cell phones and laptops
everywhere they go, office space here is at a premium and now, real
estate agents say, even pricier than Manhattan.

E-Color found rents had climbed from their already high levels to
astronomical: now nearing $90 a square foot in some hot areas. San
Francisco now has an office vacancy rate of about 1 percent -- and with
the ever-dwindling supply, many landlords are now asking for a stake in
the companies they rent space to.


E-Color, which will likely double in size to 100 people by the end of
the year, found a spot in what the San Francisco Chronicle called one of
the "most blighted, least-desirable commercial districts" of San
Francisco, The area, dubbed "mid-Market," is on the fringe of the city's
Tenderloin and Civic Center districts, where many homeless and vagrants

"There are a lot of homeless folks and stuff, but we also do a lot of
volunteer work for the homeless," said Peter Bernard, vice president of
products and marketing at E-Color. "We might hire a security guard to
walk people to their cars because people work late at night, but I don't
think it will be a problem."

E-Color was able to negotiate a rent of about $33 a square foot for a
25,000-square-foot space for an office with high ceilings and big
windows. One advantage is its central location near downtown San
Francisco and not far from the SoMa area.

As the dot-com boom encroaches, leaving nothing in San Francisco
untouched, it may help revitalize a marginal neighborhood, but at the
same time it becomes harder and harder for new and old companies to find
office and living space here.

"The pace has just accelerated into a frenzy," said Paul Bressie, a real
estate developer and sometime broker who heads up Bressie & Co. "You
have landlords who are writing leases for multiple tenants and picking
the very best one in the end."

Bressie helped start-up Keen.com find a 25,000-square-foot space South
of Market, after looking for six to seven months.

"I started looking when the market was about $40 a square foot," said
Brandon Ulrich, controller of the advice Web site company. "It was a lot
more difficult than I imagined it to be."


Building owners are now requiring letters of credit for up to 18 to 24
months rent, as a security deposit, instead of the typical six months.
Because so many new companies, flush with venture capital cash, are
vying for office space, landlords can have their pick of tenants and
often conduct lengthy interviews to determine what company will be the
most viable. Bidding wars among wannabe tenants are also occurring.

"Real estate people are playing venture capitalist," said Jon Slavet,
co-chief executive of Guru.com, a Web site for professional consultants
and free-lancers. "They want to look at the balance sheet and see why
you are going to succeed. We have gone in and pitched to real estate
people like investors."

Slavet said his company was asked by several landlords for equity in the
company, but Guru.com avoided it at all costs.

"On a historical basis, it's the craziest thing San Francisco has ever
seen," said Zach Siegel, an associate director at real estate broker
Cushman & Wakefield. "By Cushman & Wakefield's reckoning, it's 6 million
square feet of demand vs. 1 million square feet of supply right now.
That obviously doesn't paint a good picture for any tenants."

Real estate development is limited in San Francisco because of local
legislation which restricts growth. Because San Francisco is on a
peninsula, there is nowhere for companies to go but south to Silicon
Valley, where space is just as tight and a long commute for people who
want to live in the city.

Some companies are doing unconventional things in their desperation,
such as leasing a ground-level retail space for an office, pooling
together a few firms to rent a joint space, subletting extra space to
other dot-com companies, moving into live/work situations or renting
unthinkable spaces, such as dismal offices without windows in bad


Siegel said that as landlords are inundated with more dot-com companies
seeking offices, they are becoming ever leary of what many believe will
be the eventual dot-com blow up.

Just in the past two weeks, a few companies, such as online grocer
Peapod Inc., CDNow Inc. and Web health care site Drkoop.com raised
concerns over whether they have enough cash to survive the rest of the
year, a harbinger of the eventual shake-out that many analysts have been

"People are starting to shy away from the dot.com tenancies because they
foresee the Internet bubble bursting," Siegel said.

One real estate developer noticed the irony in the problem that the
Internet companies are having finding office space. Office space in the
Financial District, some with bay views, is not quite as expensive as
the priciest South of Market district, where many of the companies have
been congregating.

"The funniest thing is that the Internet is supposed to allow you to be
wherever you want, but in actuality, everyone likes to be where all the
synergy is," said Bressie.  

 1995-2000 Excite Inc.


**In accordance with Title 17 U.S.C. section 107, this material is
distributed without charge or profit to those who have expressed a prior
interest in receiving this type of information for non-profit research and
educational purposes only.**

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