Some companies such as Palm are canceling plans to build or move into new buildings, writing off tens of millions of dollars in the process. Others, stuck paying astronomical rents that they can no longer afford, are sacrificing huge deposits to back out of the deals.
"All of a sudden, in a very short time, you have a rocket that shot straight up and you now have a rocket that's shooting straight down," said Frank Fudem, senior vice president at BT Commercial Real Estate in San Francisco. "It's impacting the real estate market in a very major way."
While the woes of dot-coms and other tech companies have contributed to the glut, companies that are more on the fringe of the industry are also beginning to feel the pain--raising concerns that the worst is not over.
"At this point, what has happened has moved beyond the high-tech sector into other industries that tend to service high-tech firms," said Chuck Harry, director of analytics at Cushman & Wakefield. "Their businesses aren't growing as dramatically. Decision makers are taking a wait-and-see pattern."
During the boom years of the mid-1990s, scores of tech companies were hiring thousands of employees each quarter, which required them to lease or purchase millions of square feet of space for offices, distribution centers and manufacturing facilities.
Tech companies abandon real estate
But those plans have gone awry in recent months as sales have stalled and layoffs are more common than hiring binges. Dot-coms represent the extreme cases, with dozens simply closing shop after running out of cash, leaving vast amounts of vacant office space in their wake.
Technology companies' busted building deals are reverberating through commercial real estate markets in regions with a concentration of high-tech companies.
For example, after reaching historically low office vacancy rates of less than 5 percent in early 2000, San Francisco and Silicon Valley saw vacancy rates top 10 percent in the first quarter of 2001, according to a report by Cushman & Wakefield.
As vacancies have risen, prices have slipped, dropping 12 percent in the first quarter in some parts of San Francisco, according to the report.
Although demand for real estate appears to be picking up, it will take a while for 9 million square feet of available space in San Francisco to be absorbed, said Fudem. "Even if we did all these (potential) deals tomorrow, it wouldn't put a huge dent in the market."
Meanwhile, Boston's office vacancy rate has jumped from 4.2 percent in the fourth quarter of last year to 10.4 percent in the second quarter of this year, according to Cushman & Wakefield. Northern Virginia, home to tech companies such as AOL, has seen its commercial vacancy rate go from 3.9 percent to 12.1 percent during the same time period. And Bellevue, Wash, home to companies like Expedia and Drugstore.com, has seen its vacancy rate jump from 3.7 percent to 11.6 percent during the past two quarters.
Palm, developer of the Palm operating system and handheld devices, provided one of the most disturbing examples of how ambitious expansion plans can turn into expensive boondoggles.
Last month, Palm announced that it would sell the land that it had intended for its new San Jose, Calif, headquarters. The company reported that halting construction of the headquarters and the decline in value of that property led in part to more than US$167 million in charges in its fiscal fourth quarter.
Palm representatives declined to comment.
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