How non-tech companies get by in tech-frenzied San Francisco


5a9ad 14270818136 7f8d5b06e4 o How non tech companies get by in tech frenzied San Francisco
Flickr/Nicholas
Raymond


In the past six years San Francisco’s tech-fueled economy has
pushed rents to all-time highs, sparked a massive building boom,
and made the Bay Area one of the most dynamic and expensive
regions in the world.

Tech companies have accounted for virtually all of this expansion
over the past several years, and justifiably most of the media
coverage on the San Francisco economy has focused on how
technology companies have affected the real estate market and the
region. There’s a worthwhile conversation to be had about whether
the San Francisco economy is too exposed to tech; not unlike the
Rust Belt was to manufacturing, or Russia and the Middle East are
to oil.

A commonly overlooked reality is the fact that the San Francisco
economy is pretty diverse. Companies like Salesforce, Twitter,
Uber and Airbnb have fueled massive amounts of job creation and
absorption of office space. However, if one looks at who’s
occupying the 75+ million square feet of office space that is
leased in San Francisco, tech companies occupy less than half of
the space. So how are more traditional companies navigating a
commercial real estate landscape that has been completely
transformed by the booming tech companies?

Corporate Behemoths Provide Stability

In addition to the aforementioned tech stalwarts, the largest
employers in San Francisco include companies like Levi’s, The
Gap, PGE, Williams Sonoma, Wells Fargo and Charles Schwab.
While these companies employ large numbers of people and lease or
own significant amounts of real estate, they tend to not be
active players in the real estate market, and in some cases have
leased or owned the same buildings for decades.

They provide an underlying base of stability for the market, but
for the past decade generally haven’t been consumers of space in
S.F. Occasionally, companies like Schwab have cut back on large
blocks of space – although in the most recent case for Schwab
that space at 215 Fremont was immediately absorbed by a 300,000sf
expansion by Fitbit.

While the overall trend with these types of companies is
stability, recently some large users have re-evaluated how they
use their space in San Francisco. McKesson, headquartered in San
Francisco since the 1960s and with roots dating back to New York
in the 1830s, is currently pursuing a sale of its headquarters
building at 1 Post in the financial district. This sale would
keep their corporate headquarters in San Francisco, but downsize
their footprint in the building, while cashing out of a long-held
real estate asset that has appreciated considerably in the last
few years.


5a9ad gettyimages 2056355 How non tech companies get by in tech frenzied San FranciscoJustin Sullivan/Getty Images

Union Bank is evaluating a similar strategy at their 400
California building in the heart of the financial district. A
historic bank building overshadowed by a hulking 1960’s concrete
high-rise, the structure would require a significant renovation
in order to be marketable office space.

Union Bank and McKesson offer examples of long-time San Francisco
companies re-evaluating their real estate needs in a changing
market. However, the overall theme with similar large traditional
employers in San Francisco is hunkering down in their current
location and not making significant waves in the real estate
market.

Who’s Active in the Market Other than Tech Companies?

The companies that are considering significant expansions in San
Francisco are still, almost universally, technology companies. Of
the 20 largest companies currently looking for space, 15 of them
are tech companies, and all are looking for 50,000 square feet or
larger. Based on typical occupancy standards, this is space for a
minimum of 300 people for each of those requirements.

If we look at companies that are looking for 10,000-40,000sf –
or, generally speaking, space for about 50 to 250 employees –
there are a lot more non-tech companies in the market. These
include financial services firms, law firms and consumer products
firms, with FIRE (finance, insurance, real estate) and
professional services firms comprising most of the demand. In
this size range, there are still slightly more tech companies in
the market than non-tech companies, but the numbers are closer to
50%/50%.

Looking at who has signed office leases in San Francisco over the
past 6 months highlights the disparity between tech and non-tech.
Of 197 companies that signed leases, 86 are tech companies (44%)
and 111 are non-tech companies (56%) – fairly balanced, with
non-tech companies slightly outnumbering tech.

However, of the 4 million square feet leased by those 197
companies, tech companies leased 3.16 million square feet (77.5%
of the total space) and the 111 non-tech companies leased 918,000
square feet (22.5%). The average tech deal was 36,750sf and the
average non-tech deal was 8,270sf –in other words, the average
tech company is signing a lease that is 4x the size of the
average non-tech company.

“These stats drive home the point that in a market where space is
expensive and scarce, the large tech companies are making it very
hard for the more traditional businesses to compete. 

David Vs. Goliath

In the San Francisco Bay Area, tech companies are Goliath and
non-tech companies are David. How does David compete?

For most of the non-tech companies, San Francisco’s expensive
rents and high cost of living are huge challenges. However, there
are changes happening in San Francisco’s extremely competitive
commercial real estate market that help make this scenario more
favorable to those non-tech businesses.


58cf2 salesforce tower early How non tech companies get by in tech frenzied San Francisco
Pedestrians
walk by the future site of the Salesforce Tower in
2015.

AP

First, landlords are concerned about being overexposed to tech
tenants. Landlords have reaped the rewards of tech companies
causing rents to double over the past 6 years, but they also want
to make sure they’re making a deal with a tenant that will be
paying rent for the next 6 years. That makes established
businesses increasingly attractive as tenants.

In many cases, we’ve seen landlords willing to offer more
attractive terms to a more traditional, stronger credit business
– perhaps a slightly cheaper rent, free rent or more generous
tenant improvement allowance.

Tenant Improvements

Tenant improvements are one of the biggest areas where
established businesses have leverage with landlords. Despite a
recent increase in vacancy, rents in San Francisco haven’t
changed much – essentially they’ve stabilized after years of
massive increases. Many landlords recognize that rents are very
favorable to them, but also that the market has slowed down and
tenants have more options, including move-in ready subleases.

In order to compete, it’s increasingly common for landlords to
agree to a full turnkey renovation or to build a space out
speculatively, as opposed to the typical model of a tenant
improvement allowance where tenants are funding a significant
portion of the build-out costs. As such there are more abundant
opportunities to move into newly renovated and refreshed space
without tenants having to make an investment of their own
capital.

We’ve also found that the challenges of doing business in an
economic boomtown can provide some leverage for tenants in
negotiations with landlords. Many companies that have been in San
Francisco for years and are dealing with burdens like snarled
traffic and the disruption of major construction projects feel
their rents should be going down, not up. For those tenants,
making a compelling case to their landlord that a high rent is
going to be the catalyst that forces them to downsize to a
smaller space or move out of the city can help get concessions in
a lease negotiation.

In short, the cost of doing business in San Francisco is as
challenging as ever, particularly for companies that aren’t in
the tech space.

Companies that understand the changing nature of the commercial
real estate market, and what makes them desirable as a tenant,
can position themselves to take advantage of increased motivation
by many landlords.

Guest Blogger Eli Ceryak is a Senior Vice President and
commercial broker for Cushman Wakefield San
Francisco. He represents a broad and eclectic client base,
ranging from startup growth-stage tech companies to established
Fortune 500 firms. Eli earned his undergraduate degree from
Harvard University and received his Masters of Business
Administration from the Walter A. Haas School of Business at
University of California Berkeley.

Article source: http://www.businessinsider.com/san-francisco-commercial-real-estate-tips-non-tech-2016-9

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