SAN FRANCISCO TECH

GROWING HQ CITY

A San Francisco address gives technology companies an edge in recruiting, and as a result the city has had a rebirth as a headquarters city

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While San Francisco is the corporate home for a number of notable non-technology tenants, including Wells Fargo, Pacific Gas and Electric and Gap, Inc., the city’s reputation for hosting corporate headquarters lost some of its luster when both Bank of America and Chevron moved their headquarters out of San Francisco in 1998 and 2001, respectively. However, as the premier breeding ground for the technology industry, San Francisco has lately seen an improvement in its standing as a leading headquarters city.

Today, technology companies occupying at least 10,000 sq ft account for 30% of the office inventory, equal to more than 23 million sq ft. Unlike the tenants of the dot-com era, a great number of these tenants are publicly listed, have strong credit, or have been in business for over a decade: Salesforce, Twitter, Fitbit and Square have expanded their corporate headquarters here to nearly 4 million sq ft combined. Lucasfilm relocated its headquarters here after the dot com bubble burst, and Google and LinkedIn have each leased over 500,000 sq ft in San Francisco, outside of their corporate headquarters in other cities. Younger, private technology companies founded since the recession, including Uber, Stripe and Pinterest, dominate the South of Market district (SoMa). Together, these three companies have leased 1.7 million sq ft in SoMa in current and build-to-suit space— making up more than 10% of the current submarket in size.

Continued venture capital interest remains strong, with nearly $5bn invested into Bay Area companies in the first quarter of 2016, or more than 40% of all investments nationwide. Yet there are signs that the market is changing: Venture funding toward the end of 2015 and beginning of 2016 dropped significantly over the previous two years (while still remaining much higher than the ten-year average). As funding has slowed, several technology companies are pausing or pulling back on their space requirements, creating a modest but noticeable increase in sublease space. Moreover, 4.3 million sq ft of new space is slated for delivery by the end of 2017, 44% of which was pre-leased as of spring 2016.

While these indicators have raised red flags regarding the future health of this technology-heavy market, other indicators temper this concern. So far, there has not been a drop in tenant demand, which was stronger in the first few months of 2016 than in the first few months of 2015. The technology tenant base has a solid track

“SALESFORCE, TWITTER, FITBIT AND SQUARE HAVE EXPANDED THEIR CORPORATE HEADQUARTERS HERE TO NEARLY FOUR MILLION SQ FT COMBINED”

record of performance, and over 75% of the space leased to technology tenants occupying 10,000 sq ft or more is leased to companies that have been in business for at least eight years. Additionally, future development is capped at just 875,000 sq ft per year per San Francisco’s Office Development Annual Limit Program, which by keeping inventory low will help shield the market from any future significant drops in rental rates.

Despite any future uncertainty, the San Francisco market still reverberates from the strong technology tenant growth of the last few years: Market-wide vacancy remained below 5% at the beginning of 2016, while rents continue to climb—albeit at a much tempered pace—and sales prices per square foot are reaching record highs. Annual Class A asking rents in SoMa, the most desirable location for tech tenants, were nearly $79.00/SF by the end of first-quarter 2016. Class A rents market-wide have doubled since 2010 to more than $71.00/SF at the end of the quarter, inching closer and closer to the $71.83 peak reached during the dot-com cycle—a record achieved at that time after rents climbed 45% in only a year.

While it’s difficult at this juncture to predict where the market is heading, one fact is clear: San Francisco will remain an important headquarters city and home to a growing number of successful tech companies. 


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