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Twitter Causes Rent Surge in Mid-Market Neighborhood

Marc Perrier/Bloomberg

Twitter’s relocation next month to Mid-Market, an area better known until now for drug deals, graffiti and vagrants, has sent rents up as much as 60 percent in a business district that didn’t exist a year ago.

Twitter’s relocation next month to Mid-Market, an area better known until now for drug deals, graffiti and vagrants, has sent rents up as much as 60 percent in a business district that didn’t exist a year ago. Photographer: Marc Perrier/Bloomberg

May 11 (Bloomberg) — Douglas Shorenstein, chief executive officer of Shorenstein Properties LP, and Terry Kwik, partner at RMW Architects, talk about Shorenstein’s $300 million investment in Market Square, located in the Mid-Market area of the city.
Twitter Inc. will relocate to Market Square next month, a move that has sent rents up as much as 60 percent in a business district that didn’t exist a year ago. (Source: Bloomberg)

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The Future Offices of Twitter Inc.

Marc Perrier/Bloomberg

Scaffolding hangs on the future offices of Twitter Inc. in the Mid-Market neighborhood of San Francisco on May 9, 2012.

Scaffolding hangs on the future offices of Twitter Inc. in the Mid-Market neighborhood of San Francisco on May 9, 2012. Photographer: Marc Perrier/Bloomberg

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The Future Offices of Twitter Inc.

ZUM via Bloomberg

An artist rendering depicts the building where Twitter Inc. will relocate next month.

An artist rendering depicts the building where Twitter Inc. will relocate next month. Source: ZUM via Bloomberg

Frank Fudem, a San Francisco broker
for office tenants, realized that rents in the city were about
to spike as Twitter Inc. agreed to move to a gritty neighborhood
and leasing by technology companies started to accelerate.

“Twitter was and is the whole phenomenon,” said Fudem, a
partner at real estate services firm Cassidy Turley. “I tell
clients to make their deal as soon as they can.”

Twitter’s relocation next month to Mid-Market, an area
better known until now for drug deals, graffiti and vagrants,
has sent rents up as much as 60 percent in a business district
that didn’t exist a year ago. That type of growth is making San
Francisco the best U.S. office market as demand from Internet
and social-media companies surges.

The city’s five-year investment outlook, based on rent-
growth forecasts, beats West Los Angeles, Boston and midtown
Manhattan, its closest competitors, according to Green Street
Advisors Inc. Office occupancy in the first quarter surpassed
the pre-recession peak in 2007, at almost 75 million square feet
(7 million square meters), data from Cassidy Turley show. Annual
effective rents in the metropolitan area rose 6.8 percent, the
biggest gain in the U.S., Reis Inc. reported last month.

“It’s an outright boom,” said Kenneth Rosen, chairman of
the University of California’s Fisher Center for Real Estate and
Urban Economics in Berkeley. The economist, who advises U.S.
banks and real estate investment trusts on market trends, said
hiring at social-media and other Internet companies accelerated
office-rent gains he thought would occur in 2013.

Below Peak

Pensions, REITs and foreign funds seeking to buy U.S.
commercial property can expect values to keep rising because
rental rates are still well below the previous peak, said Joe Rodriguez, managing director at Invesco Real Estate, which
oversees $48.9 billion of property investments. The Dallas-based
company since August has purchased two office-retail buildings
in the Union Square shopping district, for $51 million and $30
million, according to Real Capital Analytics Inc.

“It’s worth noting that during the dot-com boom, office
rents approached $70 a square foot on average,” Rodriguez wrote
in an e-mail, referring to San Francisco’s late 1990s run-up,
which collapsed in 2000. “Tech and creative company demand is
healthy, and there is a robust venture capital and IPO market
for companies that happen to reside in the Bay Area.”

Rents Up 24%

San Francisco office rents rose 24 percent to an average
$46.66 a square foot in the first quarter from a year earlier,
and are up 39 percent from the market bottom in 2010, according
to Jones Lang LaSalle Inc., which tracks rates within city
limits. In the South of Market district, a popular location for
tech companies and Twitter’s current home, the vacancy rate
shrank by more than half in the first quarter to 3.8 percent,
the lowest since 2000, the brokerage said.

Yelp Inc. (YELP), the website that allows people to comment on
businesses and services, said yesterday it will relocate its
headquarters to a historic South of Market tower that’s being
renovated. The annual rent on an eight-year lease for 98,144
square feet begins Oct. 1, 2013, at $54 a square foot and
concludes at $66 a square foot, the company said in a filing
with the U.S. Securities and Exchange Commission.

Boston Properties Inc. (BXP), the biggest U.S. office REIT, and
closely held Tishman Speyer Properties LP, owner of New York’s
Rockefeller Center, describe San Francisco as their top-
performing market. Rents rose 15 percent last year at Boston
Properties’ Embarcadero Center complex and recent lease deals
were completed at rates of more than $70 a square foot, Douglas Linde, president of the Boston-based company, said on a May 2
earnings conference call.

Limits to Gains

Tishman Speyer, based in New York, will start work on two
Class A offices in San Francisco and expects annual rent gains
in the “high single digits” when leasing begins in 2014, Co-
Chief Executive Officer Rob Speyer said in an interview.

The market may not be as robust as it seems, said David
Churton, Twitter’s broker at Jones Lang LaSalle. Most tenant
leases, at 7,000 to 10,000 square feet, are smaller than high-
profile deals, and technology allows companies to produce more
with fewer people and less space, Churton said at a March real
estate conference. Macroeconomic disruption in China or Europe
might have a negative effect on local growth, he said.

“What if tech falters?” Churton said. “We’re not at peak
conditions, but we need to be cautious.”

‘Early Innings’

The boom hasn’t been limited to offices, said Steven Brown,
senior portfolio manager at Kansas City, Missouri-based American
Century Investments. REITs that own apartments in the San
Francisco area will see rents advance as much as 13 percent this
year, while revenue per available room at hotel REITs will rise
15 percent. Both will double the U.S. average, Brown said.

“It’s the strongest region in the country, and we’re still
in the early innings,” Brown said in an interview.

One of the biggest areas for growth is Mid-Market, a
forlorn stretch of the city’s main corridor where Twitter, the
global messaging service with 140 million active users, is
scheduled to move on June 1. The company’s presence will
transform the area into a “legitimate submarket,” said Fudem,
the Cassidy Turley broker.

The district resisted efforts by public officials, arts
groups and property developers to improve it over the years,
said Cathy Simon, an architect who didn’t mind the area’s
grittiness while working there from 2000 to 2009.

‘Unsavory Place’

“You had to step over people or somebody’s vomit in the
morning,” Simon, a principal at Perkins + Will and designer of
the Ferry Building offices and food market, said of her Mid-
Market years. “It was an unsavory place, not part of sanitized
San Francisco.”

Twitter chose an empty furniture mart as its new
headquarters after negotiating a six-year payroll tax exclusion
supported by San Francisco Mayor Edwin M. Lee as a way to keep
growing firms in the city and build up Mid-Market. The benefit
applies to any company that relocates to the district, roughly
defined as Market Street between Sixth and Tenth streets, said
Christine Falvey, the mayor’s spokeswoman.

Twitter had to consider all options as it experienced
“staggering” growth, including moving out of the city, said
Ron Conway, founder of San Francisco-based venture firm SV
Angel, an investor in the company.

The search overlapped with locally based Shorenstein
Properties LP’s acquisition in March 2011 of the old mart for
$120 million. As recently as 2007, barbed wire was strung on
parts of the property, which includes a 1930s main building and
1970s annex spanning Market Street from Ninth to Tenth streets,
to thwart graffiti vandals.

Ripple Effect

The purchase was made before Twitter agreed in May to be a
tenant, said CEO Douglas Shorenstein. His firm will spend a
total of $300 million on Market Square, as the 1.1 million-
square-foot property is now called. An expanded lobby with 17-
foot ceilings, six high-speed elevators, a retail area spanning
the width of the building, a courtyard, loggia and basketball
court are among the improvements, Shorenstein said during a tour
of the site.

The combination of a well-regarded developer, whose
investors include Yale University’s endowment, and the marquee
tech company produced a “ripple effect,” Lee said in an
interview. It revived a 749-unit apartment project, now under
construction across Tenth Street, and led to two purchases in
late 2011 of nearby office buildings that together have 1.4
million square feet, he said.

“That was significant and reverberated across the real
estate community,” Lee said.

Market Square Leases

Twitter’s six-year lease at Market Square gives the company
three floors with 215,000 square feet at an average annual
rental rate of $30 a square foot. In February, call center
company Callsocket.com committed to 29,000 square feet in the
building at $42 a square foot. Onekingslane.com, a home-decor
sales website, followed in March, renting 52,000 square feet at
$44 a square foot.

Yammer.com, a social network for businesses, last month
signed the most recent lease, taking 79,000 square feet at $48 a
square foot, or 60 percent more than Twitter.

Rates in a nearby office property purchased in the wake of
Twitter’s announced move will range from the high $30s to the
low $50s a square foot, said Stuart Shiff, CEO of DivcoWest
Inc., which bought the building in a joint venture with TMG Inc.
The closely held San Francisco firms paid $44 million in October
for the 385,000-square-foot property, according to New York-
based Real Capital. It is scheduled to open in the first quarter
of 2013, Shiff said.

‘Head and Shoulders’

For landlords, the city’s market should outperform for at
least the next four years, according to Green Street Advisors.
San Francisco office properties are forecast to gain 7.9 percent
in annual revenue per square foot through 2016, “head and
shoulders” ahead of 6.6 percent for West Los Angeles, 6.3
percent for Boston and 5.7 percent for midtown Manhattan, said
Jed Reagan, an analyst at the Newport Beach, California-based
real estate research company.

“The concentration of tech in San Francisco is driving it
as a whole,” Reagan said in an interview. “From our
perspective, it’s the hottest market in the country.”

To contact the reporter on this story:
Dan Levy in San Francisco at
dlevy13@bloomberg.net

To contact the editor responsible for this story:
Kara Wetzel at
kwetzel@bloomberg.net

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Article source: http://www.bloomberg.com/news/2012-05-11/twitter-rent-surge-makes-san-francisco-best-office-market.html

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Technology firms are the economic engine of the Bay Area. But so are real estate and restaurants, which would be asked to pay more taxes under a plan pushed by technology companies and investors.

San Francisco’s tax plan is due to be overhauled, and one way to do it is to institute a gross receipts tax instead of a payroll tax. Tech firms and investors like Ron Conway, a Silicon Valley billionaire, like that plan because tech firms spend much more on payroll than they do on sales of products, according to the San Francisco Examiner.

Tech firms pushed a gross receipts tax “hard” during a meeting at City Hall with Mayor Ed Lee and Board of Supervisors President David Chiu, according to reports.

San Francisco-based companies currently pay a 1.5 percent tax on their payrolls, the newspaper reported. Twitter, however, convinced city leaders to write laws allowing for a special payroll tax exemption zone, and Zynga also convinced the city to write an exception on taxation of stock option compensation.

If the payroll tax is replaced with a gross receipts tax, retail, restaurants and real estate would pay almost double the tax currently paid, the newspaper reported. They’d pay 26 percent of the total tax revenue, compared to 16 percent now, the newspaper reported.

The payroll tax currently brings in $400 million a year, the newspaper reported.

“The tech companies don’t seem to be team players,” small-business advocate Scott Hauge told the newspaper.

Any final language on taxation issues will be fleshed out by June, when city leaders would have to make moves to place a change in the tax structure before voters in November.

Copyright NBC Owned Television Stations

Article source: http://www.nbcbayarea.com/news/local/SF-Tech-Firms-Want-Retail-Real-Estate-To-Bear-Tax-Burden-149547085.html

I’ve recently learned that real estate brokers in San Francisco have reached a consensus on a topic that entrepreneurs and investors can’t seem to agree on: that we are in the midst of a technology bubble.

Technologists have been debating the existence of such a bubble for over a year now, but they just can’t seem to agree. Some argue that companies like Twitter, Facebook and LinkedIn, are overvalued with multi-billion dollar valuations. Others say that technology companies are actually undervalued.

Real estate brokers in San Francisco have seen the evidence of a new dot-com style bubble: Rents are shooting up as the demand for apartments grows. As a newcomer to San Francisco, I can attest to how frantic the search for apartments has become in the area, and to the often audacious pricing of rental properties.

An article published on Thursday in The San Francisco Examiner notes that Bay Area renters are now seeing rent hikes that are eerily similar to those during the dot-com bubble that occurred a little more than a decade ago. RealFacts, a real estate analysis firm, told the Examiner that a new wave of San Francisco residents who work for technology giants and start-ups seemed to be responsible for the rise in apartment rental costs.

“I think a lot of new dot-com employees, specifically those who work for companies like Apple, Google and Twitter, are now moving into the city and can afford to pay much higher rents,” said Sally Kuchar, editor of the real estate blog Curbed San Francisco, told me in a phone interview. ”As a result, San Francisco rental rates have risen by 6 percent between 2010 and 2011.”

As a very recent transplant to San Francisco, I’ve visited dozens of open houses over the past week and already see a frightful pattern. When I show up to see a property there is always a long line of young people, mostly wearing t-shirts adorned with Twitter, Facebook or Google logos, who are standing at the ready with an application, credit report and deposit check in hand. They often bid up the price of an apartment by several hundred dollars too.

Real estate brokers I’ve spoken with note that although the San Francisco market has always been challenging for renters, the current state of affairs is extraordinary.

Ms. Kuchar of Curbed said rents were also rising because more landlords were choosing to turn their properties into short-term rentals using services like AirBnB, a company that lets people rent out their spare bedrooms or homes to travelers.

“A lot of residential property owners are now converting their long-term rentals into vacation rentals; that has also depleted the market,” Ms. Kuchar said. She also said that though high real estate prices make it clear there is a new bubble in Silicon Valley, no one can really predict how long it will take before it pops.

Article source: http://bits.blogs.nytimes.com/2011/08/05/tech-and-the-san-francisco-rental-bubble/

“San Francisco jumped to the No. 1 position in the country” for office real estate performance, said Colin Yasukochi, vice president of research at Jones Lang LaSalle and author of one of the reports. “Technology companies are the underlying driving force in the San Francisco market. It’s recovering very quickly” from the economic downturn.

He shows the city’s average asking office rent at $40.06 per square foot, up from $33.71 a year ago.

Over the past four quarters, about 1.3 million square feet of space was absorbed by tenants, “the best four quarters since 2008, which was the peak of the market,” Yasukochi said. While the vacancy rate overall is still a relatively high 16.2 percent, in hot neighborhoods such as South of Market, it’s only 6.9 percent, he said.

Chris Macke, senior real estate strategist for research firm CoStar Group in Washington, agreed that San Francisco is bouncing back.

“You folks have seen steady rental-rate increases for effectively every quarter since early 2010, whereas nationally they’re still having rental-rate decreases,” he said. “In the second quarter, San Francisco had the largest rental-rate increases, going up 4.4 percent compared to the first quarter. That’s very, very strong, far better than anywhere else in the country.”

Part of the dynamic is that San Francisco tends to be volatile, as supply is constrained for the most sought-after, higher-quality “creative” spaces. “It’s a market that is prone to greater increases and decreases; it acts like a tightly wound rubber band,” Macke said.

Bright outlook

The San Francisco metropolitan area, which includes San Mateo County, was also on top for rent increases between the first and second quarter in a report from research firm Reis.

“I think the outlook for San Francisco is relatively bright,” said Ryan Severino, an economist at Reis. “We expect to see fairly robust rent growth there this year.” Both Oakland and San Jose metro areas also are benefiting from increased office demand, Reis found. It ranked San Jose fourth in the nation for rent increases and the East Bay ninth.

Tech firms increasingly are branching out from SoMa into downtown, previously the domain of more traditional companies.

‘The hustle and bustle’

“We like the hustle and bustle of the Financial District,” said Alex Mehr, co-founder and co-CEO of online dating site Zoosk Inc., which signed a lease in the second quarter for 21,391 square feet at 475 Sansome St. It already was subletting the space from Yahoo.

“Software companies prefer SoMa because they hire a lot of Java developers who live in the South Bay and so (being near) Caltrain is an advantage,” Mehr said. “But we’re a Web company and our developers live in San Francisco, so the Financial District is a much easier commute for them.”

Zoosk went from about 20 employees 18 months ago to almost 90 now. Mehr expects the staff to double annually, so the company will soon outgrow its current location. Rising rents don’t concern him too much.

In the heart of the city

“The advantage of being in the heart of San Francisco with quick access to BART and having all that action all around us outweighs any increase in prices,” he said.

Meade Boutwell, senior vice president with broker CB Richard Ellis, recently represented a downtown building that remodeled a 3,000-square-foot space specifically to lure tech tenants.

“The Mills Building at 220 Montgomery is one of the oldest buildings downtown, it’s a classic that survived the 1906 earthquake,” he said. “It’s class B space with traditional dropped ceilings. We tore out the ceilings, exposed the raw concrete, brick and piping, which made it very creative-looking. The tech tenants that all wanted SoMa in 2000 said they loved the feeling of the space; we had nine offers.” A tech company leased the space for $41 per square foot, a premium from its $35 asking price. Now the owner plans to do a similar rehab elsewhere in the building.

Executives at Starwood Property Trust, a real estate investment trust based in San Francisco, said they are bullish on the city.

“San Francisco has held up better than most markets,” said Chris Tokarski, managing director and chief credit officer. “In particular the tech growth is creating more pressure and space is leasing up quicker. You can say that about apartments, retail and office. It clearly is seeing growth on all fronts.”

E-mail Carolyn Said at csaid@sfchronicle.com.

This article appeared on page D – 1 of the San Francisco Chronicle

Article source: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/07/08/BUUK1K7QG3.DTL&type=tech