Posted by: BayAreaComRE | September 14, 2010

The State of South of Market and the Tech World

Kudos to the San Francisco Business Times for mentioning this often overlooked trend. While technology tenants continue to flock to the South of Market area of San Francisco, high-quality, creative office space is diminishing rather rapidly. Many tenants and occupiers seem to think that they are in the drivers seat given the economy on a macro level, however commercial real estate is very much a supply-demand driven asset class, especially on the micro level. For example, if a technology / media tenant hears that all of the top start-ups are flocking to a specific building because of its design features, access to public transportation, etc. and there just so happens to only be one vacant space left in the building, the landlord can really charge whatever it feels for that given space, especially when potential lessors are lining up out the door.

“High-flying tech companies are chasing scarce SoMa office space, reminiscent of the early dot-com boom days. Despite 18 percent office vacancy rates in downtown San Francisco, a growing number of tech tenants are struggling to find the sort of creative space they traditionally have been drawn to.”

The article goes on to talk about that same supply-demand discrepancy, which we wholeheartedly agree with. It’s situations like these where it’s especially important to seek the advice of a real estate professional. Tech tenants live in a time where the service sector has been flattened. Legal services, financial services, coding, programing, and even grocery shopping can all be done on the web nowadays, but these same companies often forget how intricate a real estate transaction can be, how many steps are involved, and also how important the human interaction can be. An office lease is typically the second cost line-item in a companies balance sheet behind employment, so taking the right care and time in due diligence is just as important.

In any event, this supply-demand imbalance is beginning to create an interesting situation in SoMa and along the Caltrain corridor. As we mentioned in post from some time ago regarding engineering pools, there is a great discrepancy of population in Valley as compared to the city and therefore a larger pool of engineering talent. “When looking at a direct comparison, I think you have to take into account the larger population of the South Bay versus San Francisco and the Peninsula. Silicon Valley has a population of about 2.6 million versus San Francisco’s 800,000. This combined with more than 35% of the active workforce having a bachelors degree or higher, represents a significant talent pool.” This translates to a large amount of demand in and around the CalTrain corridor as any Human Resources manager will tell you.  Putting an employee, especially an integral engineer, on more than one method of transportation in a day often causes frustration. As the supply of leasable inventory diminishes in SoMa, pricing begins to increase; but this doesn’t necessarily cause an exodus to the markets in San Francisco where supply is high (i.e. financial district, civic center), due mainly to the commute patterns mentioned above.

What will happen in the next few quarters will be very telling for the market, as activity tends to pick up in the fourth quarter typically. In the last dot-com run up, landlords with traditional inventory became aware of the overweight tech demand and underwent speculative modifications to their buildings to appeal to the creative tastes of those tenants. What happened in the aftermath of that remain was a highly publicized trail of massively indebted Lanldords with half-finished projects and bankrupt tenants with one foot out the door. Will the same situation occur this time, or will the growth be more steady and manageable? As always, we’ll continue to track the trends and keep you posted on the state of south of market. For the time being, we’ll sit back and count our chickens in a market where we hear: “Facebook is in the market for 1,000,000 square feet, VM Ware for 500,000, Twitter for 100,000, Zynga for 300,000, etc. etc. etc.”

As an aside, we’re pretty excited about “The Social Network” opening in theaters October 1st. Obviously everyone knows the basics of Mark Zuckerberg and Facebook’s story, but the David Fincher version of Silicon Valley’s current sweetheart will likely be overdramatized to make for a fun night at the movies and likely additional motivational fuel to some up-and-coming start-up’s fire.

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