San Francisco to lose 80 percent of dot-coms

A new study predicts that San Francisco could become a dot-com disaster area in the next year, losing some 30,000 jobs.

In an ominous sign for this Internet boomtown, the authors of a new study project that about 80 percent of the remaining dot-com companies in the Bay area will collapse in the next year, wiping out some 30,000 jobs

SAN FRANCISCO - The report, set to be released Thursday by real-estate services concern Cushman & Wakefield Inc., of New York, and Rosen Consulting Group, bases its projections for dot-com closures in part on a review last month of the debt levels and current and projected earnings of a sampling of 150 publicly traded Internet companies.


The study, which focuses primarily on how commercial real estate will be affected by the technology shakeout, estimates that Internet-related companies will give up another four million square feet of real estate in the next year, a huge amount of office space. That number was based on the Internet closure projections, coupled with a review of nearly 1,000 lease transactions in San Francisco and sublease space that already is available.

During the past few years, prices paid for office real estate in San Francisco soared to among the highest levels in the nation. At the peak last summer, prices paid for office property hit a high of slightly more than $500 a square foot, according to Cushman & Wakefield. Rents rose even faster, as vacancy rates shrank to near zero in many areas, largely because of space-hungry Internet companies.

Rosen Consulting, which specializes in economic and real-estate consulting, estimates that about 150,000 people in the Bay area were employed in the dot-com sector at the beginning of last year, and about 22,000 of those jobs have been lost since then.

The Berkeley, Calif., firm estimates that eight million square feet of the 66 million square feet of total office space in the city had been leased by dot-com companies as of last year. Property owners, particularly those who own warehouse-type buildings in the so-called South of Market area where many Internet and technology companies flocked, have had to contend with rising vacancy rates and falling rents. While the report is bad news for landlords, some suggest the overall San Francisco economy will remain stable. Despite the weakness in the manufacturing and dot-com sectors, "more traditional service industries have been adding jobs, and smaller companies that have been priced out of the labor market are now starting to recruit people," says Kei Matsuda, senior vice president of economic research at Union Bank of California.

Stephen Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto, Calif., believes that while more dot-coms may fail, "those that meet the test of the market will survive and grow and prosper." In the end, "we're going to have more software and computer service jobs" of which the dot-coms are a small portion, he says.

The study found that average rents for top-tier, class A space in the South of Market area fell 8.5% to $63.60 a square foot during the first three months of the year, while class B office space fell 24% to $55.32. In the Financial District, average rents for class A office space declined a more modest 7.5% to $74.16. By comparison, at the beginning of the year, the average Class A rent in midtown New York was $67.11 and was $35.63 in downtown Chicago, according to Cushman & Wakefield.

Adding to the growing surplus of office property, 4.6 million square feet of office space is expected to come on the market during the next two years, though about half of that already is leased. Another 1.4 million square feet of renovated space will come on the market by next year.

Despite dwindling tenant demand in San Francisco, Kenneth Rosen, chairman of Rosen Consulting, says rents of $50 to $60 a square foot will remain in high-quality buildings. "The correction," he says, "will improve the long-term health" of the real-estate market.