Written by Bill Wilson

How many times, through the years, have you heard that question?

On the business front, we are looking for clues for the timing of the next business downturn. In San Francisco, we have had four years of recovery and all signs are glowing. In the last year, the tech sector has soared 17% to 53,300 jobs. In the Central Business District of San Francisco, the direct vacancy is around 6.7%. City-wide, the direct rate is 7.2%. That’s quite a different picture than in early-2001 (at the peak of the bubble) when there were only 32,500 people in high tech.  At that time, the vacancy in the CBD was only 2%. Throughout the roaring days, the tech crowd shunned Class A, preferring Class B warehouse space South of Market for the low rates. For the last four years, during the new recovery, there is still a preference for Class B side-core buildings with high ceilings known as “creative space”.

Those converted SOMA warehouses are now mostly full, forcing a lot of tech users to rethink the necessity for “creative space”. What sets Airbnb, Linkedin, Twitter or Salesforce apart from the rest of the “tech crowd”? Do they need side-core “creative space” to do their jobs. Of course not! Out of necessity for space, the tech star, Salesforce, reversed course and concentrated on Class A in the CBD. On top of their prior space, this year they leased all of 350 Mission Street (450,000 r.s.f.) and over one-half of the former TransBay Tower at 415 Mission Street (710,000 r.s.f.). The easy walk in the CBD to BART/Muni has attracted corporations with employees who have to commute from all surrounding communities, reflecting San Francisco’s housing crisis. This places a premium on space close to major transportation facilities.

Despite the nearly 7% direct vacancy in the CBD, large users are having trouble finding spaces exceeding 100,000 r.s.f. For many of my readers, that won’t be a problem. But the earlier restriction of Proposition M could constrict the availability of new construction, sending rents higher. Prop M restricts the amount of square footage in yearly allotments to 875,000 sq.ft. Despite 5.1 million sq.ft. in unused building allotments at the end of 2013, recent market activity has sapped that figure to zero. That restricts the movement of more large corporations moving to S.F. The rent pressure will fall on the small tenants, particularly those who use less than 10,000 r.s.f. According to CoStar, in the CBD there are 240 spaces below 5,000 r.s.f. and 132 spaces in the 5,000-10,000 r.s.f. range. (Note: These don’t include sublease space.) There are choices, but not a lot!

So it looks like there will be limited space in the next two years. Use it to share in the prosperity which is presently upon us!


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