Tech firms clamor for space in bubbly SF market

Thu, 22 Mar 2012 10:29:02 +0000

By Therese Poletti, MarketWatch

SAN FRANCISCO (MarketWatch) — The commercial real estate market is on fire in San Francisco, driven by both large and small tech companies looking for more office space to keep up with their growth.

Earlier this month, San Francisco Mayor Ed Lee’s office touted the fact that eight tech companies signed leases for over one million square feet of office space in January and February, companies ranging from big companies like Macy’s.com

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, Salesforce.com

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, LinkedIn Corp.

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and the smaller StumbleUpon.

“We have a market that is red hot,” said Frank Fudem, a senior vice president at Cassidy Turley, a commercial real estate firm in San Francisco. “We will probably see single-digit vacancy next quarter.”

With the end of the first calendar quarter approaching, local realtors say that so far, there are a few indicators that the city could see absorption levels — meaning the rate at which the amount of available space is leased — not seen since the first quarter of 2005, when 1.12 million square feet of available office space was absorbed.

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The deals by some of the bigger tech companies, mostly in software, may also make it harder for startups to find office space, as big companies are leasing large swaths of offices, and in turn pushing up the rents. Those factors are making it harder for young companies to find space in the most desirable areas, such as the trendy South of Market (SOMA) area.

Frustration and innovation

Indeed, these issues with the commercial real estate market helped fuel a new company, called 42 Floors, which is based in Redwood City, Calif., until it can find a space in San Francisco.

“We created our company out of our frustration with the technology,” said Jason Freedman, co-founder of the nascent five-employee firm. “It’s very hard to get access to the listings to see what’s out there, especially in the Bay Area where everything is just on fire.”

Freedman and his co-founders created a website, which is still in beta, for commercial real estate listings with lots of photos and details, akin to what both Trulia and Zillow.com

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have done for the residential real estate market with their comprehensive listings.

“Everyone has a dream if they are a tech company,” said Freedman, who got his broker’s license as a way of doing homework on his initial idea. “They will be in SOMA with outstanding light, with a one-year term, at an outstanding price. I just say pick two, you can’t get all three or four.”

Roman Stanek, founder and CEO of GoodData, a developer of cloud-based software that helps companies analyze customer data, said his company will have to eventually expand. Founded in 2007, GoodData currently is in the financial district, but has grown to 150 employees, from 40 a year ago. Half its employees are in Prague. “For us, when we move, we will have to look for non-conventional spaces,” Stanek said.

Unconventional office spaces could become popular among this generation of startups, which are more frugal than the famously decadent, mad-money-spending dot-com startups of the late 1990s.

Therese Poletti/MarketWatch

Once shuttered, St. Joseph’s church is being restored and converted to office space.

Construction has begun on an empty but iconic 1925 skyscraper known locally as the Telephone Building, in the South Financial District, where its owners Wilson Meany Sullivan were inspired by the improved office market to begin work on their $50 million rehabilitation project. The building, previously owned by ATT Inc.

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, was sold in its post-merger consolidation and has been empty for nearly six years.
Read more about plans for 140 New Montgomery (subscription required).

Micro-blogging star Twitter is blazing a trail and later this year will be moving into three floors of a 1937 Art Deco building that was originally a furniture mart and showroom, in a sketchy area of San Francisco called Mid-Market or central Market. Just as necessity has led to new tools to help deal with the real estate problem, there are also hopes that this real estate boom or bubble, along with some tax benefits from the city, could help revive the most blighted area of San Francisco.
Read previous column about Twitter’s move.

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Rendering of a proposal to convert the 99-year-old St. Joseph’s church into office space.

Last month, two former altar boys got city approval to convert St. Joseph’s, a long-shuttered 99-year-old Romanesque church into an open office. The location several blocks away from where Twitter will be moving. Chris Foley of the Polaris Group bought the church a few years ago and is working with Brian Spiers Development. They plan to restore the church to its former grandeur as a unique 22,000 square feet of office space. Financing is lined up, pending the signing of a lease and the $15 million to $18 million renovation and seismic upgrade project is expected to begin this summer.

“We got all the pigeons out and then boarded it up and cleaned it up,” Foley said. The church has to be kept boarded up and the doors bolted tight to prevent homeless people and drug addicts from breaking in and doing further damage to the church. It was closed and eventually sold by the Archdiocese of San Francisco after the 1989 Loma Prieta earthquake. “They weren’t the benign, low-grade homeless. They were cooking meth,” Foley said.

When asked if they are nervous about the unpredictable nature of tech startup companies and how the last real estate and dot-com bubbles ended, the developers said they were confident that things have changed. New, more sustainable businesses associated with smartphones, tablets, software applications and cloud computing have been created this time around.

“It’s a totally different world than 1999,” Spiers said. “There have been lessons learned here.”

But if you are trying to buy a house in San Francisco or in areas of Silicon Valley, especially houses with close proximity to shuttle stops for the commuter buses that go to Google

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, Apple

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or many other companies, you are probably cursing the market, just as the companies are that are looking for more space.

“I’m not suggesting that the companies are reminiscent of the bubble, but in terms of real estate, it is,” said Fudem. “We are seeing multiple offers in some cases and a very steep escalation in rents.”

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