Jean Ko, TRI Commercial/CORFAC International
San Francisco is a veritable boom town that has already surpassed the market roar of 1999. It can even conceivably be compared to 1849, when gold was discovered 100 miles east. In fact, this year is so utterly off the charts that most of us in the commercial real estate industry have never seen an upcycle like this in our entire careers.
Witness the fact that through the first three quarters of 2014, San Francisco’s gross office absorption reached 7.6 million square feet. Net absorption in this same period was 2.4 million square feet. This compares with 1999, the record year, when gross absorption was 7.4 million square feet – and that was for the entire year! It is quite possible we’ll hit 10 million square feet of gross absorption by the time 2014 closes out. Incidentally, net absorption for 1999 was “only” 526,000 square feet.
Not surprisingly, three out of the four biggest leases in the third quarter were completed by tech companies. The tech frenzy in San Francisco has been well documented. Most of the Silicon Valley companies want, or need, to have a presence in the city. The trend is employment-driven. Young techies don’t want to commute to the suburbs, and there are plenty of jobs.
San Francisco added 1.11 million new jobs between August 2007 and August 2014 – a 10.5 percent increase in the employmented base here, according to Chris Thornberg, founding principal of Beacon Economics. The city’s employment gains are greater than all other California cities. They also rank among the highest, if not the highest, in the U.S. during the recession’s recovery.
This makes now an exciting time to be in San Francisco, but it comes with the risk that our local and regional economy is overly dependent on sustainable growth by technology companies.
For a little perspective, our CORFAC International colleagues from London recently paid TRI a visit. Farebrother/CORFAC International told us that while tech is also hot in the U.K.’s capital, it accounts for a reasonably healthy 15 percent to 20 percent of leasing activity in London. San Francisco’s leasing activity is 65 percent tech-driven or more.
When rents used to get out of hand during upcycles, companies would typically flee to Oakland and other points in the East Bay. Not tech companies in this cycle. We’ve created a new submarket to absorb some of the growth: Mid-Market, where Twitter is headquartered.
Composed of some 3.5 million square feet, no one would have located their businesses there five or six years ago. Nowadays, if space is tight in the historic tech center of SOMA (South of Market), tech companies will take space in traditional office properties in the Financial Center. They will simply make their interiors as creative as possible by gutting drop ceilings, increasing ceiling heights and exposing concrete and HVAC ducts.
By Jean Ko, Senior Vice President of TRI Commercial/CORFAC International in San Francisco. This article originally appeared in the November 2014 edition of Western Real Estate Business magazine.