Imagine that you own a business. That business is headquartered in the third most-expensive office real estate markets in the country, which also happens to be the ninth most-expensive office real estate market in the world.

In other words, your business pays through the nose for its real estate needs. If you lease an average Class A office in this expensive market, you shell out $81 per square foot.

At those rates, your expectations are high. You require clean common areas, a high level of safety and all of the amenities. Oh, and one other thing. Power. At those rates, you want access to electricity 24 hours a day and seven days a week.

Is that so much to ask? It is if you work in this particular over-priced market, which happens to be San Francisco.

We’ve all been bombarded by the recent news of rolling blackouts and power shortages in California. Since this crisis still is developing, with no real ending in sight before the construction of new power plants is completed in the coming years, its impact on the California economy still is unknown.

But with the incredibly strong growth the San Francisco real estate markets have experienced in recent years, isn’t it inevitable that the energy crunch put a damper on the party?

In the central business district (CBD) alone, San Francisco saw growth of 4 percent in its real estate markets last year, according to Colliers International. CBD vacancy rates stand at just 4.2 percent, among the lowest for large markets across the country. Can this growth be sustained when Bay-area businesses are losing big bucks each time the lights go dim?

The California economy generates $1.3 trillion a year, which is the sixth-largest in the world. The state exports more than $100 billion in goods a year and creates jobs at twice the national rate.

But the businesses that create this stunning economy already are hurting from higher energy prices and unreliable supplies of power. High-tech firms alone have lost tens of millions of dollars, mainly due to building shutdowns and idled employees. According to the Silicon Valley Manufacturing Group, companies can lose as much as $1 million a minute when power is cut.

Plus, under pressure from the state, many businesses are being forced to send workers home after an eight-hour day. Peak usage times of 5 p.m. to 7 p.m. are difficult for the electric companies to sustain, and companies have been asked to be particularly thrifty during these key hours.

Such losses could prove a strong incentive for relocation. After all, these businesses already pay some of the highest rates in the world for real estate, in addition to high wages required to support their employees’ lifestyles. California businesses also face two additional barriers: corporate taxes and high energy bills.

Despite its boasts of being one of the best places in the world to live, in large part due to usually mild weather and a strong economy, California soon may see its largest employers expanding into other regions. Some heavy manufacturing companies already have suspended operations, unable to pay skyrocketing energy bills.

Some businesses already have seen their electricity bills double in the last month, with possibilities for more hikes in the days to come. After all, wholesale electricity prices are as much as 10 times what they were a year ago. And it doesn’t help that the state has remained for days at Stage 3 in the emergency hierarchy. Real estate firms are pleading with tenants to conserve energy whenever possible, while the state warns businesses to shut off equipment during blackouts to prevent damage to sensitive components.

Intel already has said that his company will not expand further in California, largely because of costly and unreliable electricity. And California state officials, who are largely blamed for designing a poor deregulation scheme, can only guess how many businesses will decline to locate to their state because of faulty energy policies.

If California sees stagnant real estate markets for the first time in years, there is little doubt that fingers will point at the energy problem. Any companies who already have planned expansion or relocation to the state now must reevaluate their decisions, adding in extra square footage for generation sites and other alternative power supplies.

Meanwhile, real estate owners and brokers must brace for the fall-out. Few business tenants are likely to put up with third-world power supplies when paying the ninth-highest prices in the world.

Published: January 24, 2001

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Lesley Hensell covers commercial real estate and financial issues for Realty Times. Based outside of Dallas, Lesley works with high-tech and real estate clients as an independent marketing and public relations consultant. She also writes for several publications, including the Dallas Morning News. E-mail Lesley at: lhensell@earthlink.net