What's Real in a Dot-com Driven Office Market?

True Value Debate... Is dot-com mania totally responsible for today's sky-high real estate prices? If dot-coms stumble, will real estate values surely follow? In a red-hot market like San Francisco, those are important questions. First, let's back up. We're now about five years into the "Internet economy." Netscape went public on August 7, 1995 -- the same day that Jerry Garcia died. And ever since, public consciousness of the web has grown.

Over the last five years, office rents in Internet hot spots like San Francisco have escalated dramatically. So you hear about $100 per square foot rents for trophy buildings and $50 rents for Class B space. Are these true market rents? Will they last? Should building values be based on these rents? So far the answer appears to be mixed. The San Francisco Business Times (July 7-13, 2000) reported on two pending sales in the $330-370 per square foot range, and added that these are "among dozens of San Francisco properties on the block as investors hope to cash out before the market goes south."

On the other hand, Alan Collonette of Grubb & Ellis argues strongly that San Francisco was undervalued for years due to a building binge in the 1980's and deserves to be at the top of the rents and sales charts. Although no Class A building has sold for over $400 per square foot, Collonette argues that an average rent of $66 per sq. ft. would produce a "true value" of a Class A building of $671 per sq. ft., based upon an 8% capitalization rate. If this is true, there is potential for dramatic sales price increases from current levels. ... What do you think? Do you believe that dot-coms have distorted your office market? Send e-mail to me at ppike@pikene.com.

PikeNet Expo... Would your company like to join one of the dozen Pike's Parades? Want to sponsor an event? Go to the new Expo web site at www.pikenet.com/expo and contact Eileen Circo ecirco@pikenet.com. ... Connect, Communicate and Collaborate at the PikeNet Expo in the New York Hilton, Oct 23-24, 2000.

--Peter