Dot-com bomb creates plethora of office space

Joann Loviglio

Friday, April 6, 2001 | 11:14 a.m.

CONSHOHOCKEN, Pa. -- Last May, 4anything Networks had 114 employees, 14,500 square feet of high-tech office space and was dreaming of a growth-filled future. But by January, the suburban Philadelphia online search company was down to only 14 workers and 3,000 square feet of its expansive digs.

"Last year at this time there was talk about expansion," said Stanley Green, chief executive officer of 4anything. "Now the goal is to make sure we stay in existence. We did what was necessary to ensure we'll be around."

The company is one of many that fed suburban Philadelphia's aspiration to become a technology center. Developers raised office buildings and rehabbed empty factories at a lightning pace in the late '90s to accommodate scores of new and expanding dot-coms.

But now the reality for technology-driven real estate markets here and elsewhere is "For Rent" signs as Internet companies scale back or shut down completely.

"There are buildings where dot-com companies took space and never occupied the space," said Carl Gersbach, executive director of Insignia ESG Inc., a commercial real estate firm in Berwyn, Pa.

Recent figures put vacancy rates for commercial office space in Conshohocken at 13.2 percent at the beginning of the year. When empty sublet space is included, the number jumps to 14.4 percent. Six months earlier, that vacancy rate was 9.4 percent.

Three dot-com failures in 2000 in the Conshohocken region dumped 140,000 square feet of office space on the market and some of it is still empty, Gersbach said.

The scenario is being played out from coast to coast. More than 270 dot-coms have shut down nationwide since January 2000, 70 percent of them in the last four months, according to Webmergers.com, which tracks and values Web companies.

In Seattle as of mid-February, dot-coms were looking to sublet 1.4 million square feet of office space -- more than 10 times the amount available at the end of 1999, said Michael Dash from the Seattle office of real estate giant Colliers International.

"In the early throes of the tech boom, dot-coms were taking out space wherever they could find it. The frenzy was unbelievable," Dash said. "In 2000 we had five or six (prospective) tenants looking at a space. Now it's two or three."

Including sublease space, Seattle is currently looking at a 6.5 percent to 7 percent vacancy rate. In the second quarter of 2000, rates were less than 1 percent, Dash said.

Teledesic, a broadband satellite company in Bellevue, Wash., shrank from 115 employees in July 1999 to 55 today. It's trying to sublet its 72,000 square feet of leased space.

"The satellite industry has been particularly hard-hit," Teledesic spokesman Roger Nyhus said. "We're trying to conserve our resources and be prudent with our investors' money."

Despite the softer market, real estate companies from Pennsylvania to California say the sky isn't falling. Demand remains strong, they say, though from more traditional firms like law offices and consulting companies.

Rising vacancy rates have had little impact on rent prices in the Philadelphia suburbs, but other cities have seen more dramatic drops.

In Boston, premium office space that cost $80 per square foot nine months ago is now closer to $60, according to Boston real-estate firm Meredith & Grew Inc. In Boston's suburbs, rents fell from $55 per foot to $45 as firms like Smarterkids.com, Infolibria and Micro Systems Inc. shrank.

In greater Atlanta, where Amazon.com closed an 800,000-square-foot distribution center, some brokers estimate the office vacancy rate will rise a couple of points from the 11.9 percent recorded in December.

But ground zero in the dot-com demise is the San Francisco Bay area. In the last month alone, tenants have bailed out of more than 1 million square feet of office space, said Dan Mihalovich, founder of Mihalovich Partners, a commercial real estate services firm.

"The pace of new listings is, unfortunately, hard to keep up with," said Mihalovich. "Keep your hardhat handy -- we may be halfway into this cycle, if that far."

While concerned now, Mihalovich says he is upbeat about the future.

"It's just a matter of time before the upswing kicks in," he said. "There's not a shortage of investor capital, but now the investors are definitely smarter about their money than they were."

While contraction is the rule, some Internet companies are seeing expanded space needs. Online marketplace Half.com went from a 500-square-foot space in Conshohocken just 18 months ago to 30,000 square feet of newly renovated digs in a former tire factory nearby.

"The great thing now is that there's a growth factor," Half.com spokeswoman Kristin Keyes said. "There's more space within the building that we can move into."

Software developer Synygy Inc. also continues to grow -- from about 38,000 square feet of office space in the region last year to 76,000 square feet between Conshohocken, Phoenix and Chicago, said Mark A. Stiffler, Synygy president and chief executive.

"We created a market -- we were not a 'me-too,' " he said. "Even though our business is an e-business, we never got caught up in playing the dot-com game."