San Francisco’s office market is rebounding after record space cuts by banks, buoyed by technology companies including Twitter Inc. and Salesforce.com Inc. (CRM) that may lease as much as 7 million square feet this year.
Internet, software and social-networking firms may help San Francisco approach last year’s 7.5 million square feet (697,000 square meters) of leasing, the most since 2000, broker Jones Lang LaSalle Inc. (JLL) said. Twitter, the messaging service with 175 million members, and Salesforce, the biggest provider of Web enterprise software, are both based in the city and seeking to rent a combined 400,000 square feet of new space this year.
San Francisco’s vacancy rate will drop more than any other U.S. city’s in 2011, declining to 14.8 percent from 15.6 percent, according to Reis Inc. (REIS) A $1.5 billion financing round for Facebook Inc. led by Goldman Sachs Group Inc. (GS) and JPMorgan Chase & Co. (JPM)’s new $1.1 billion venture fund show confidence in tech firms and signal the city is poised for more leasing, said Colin Dyer, chief executive officer of Jones Lang LaSalle.
“San Francisco has come out of rental and asset-price decline faster than any other U.S. city, with the exception of Washington,” Dyer said in a telephone interview. “Wall Street’s interest in social media, the funds put together by Goldman Sachs and JPMorgan, only make the tech community more influential.”
Occupancy grew by 600,000 square feet in the fourth quarter, double the amount in the previous three months and the first back-to-back quarterly gain since 2007, brokerage Cassidy Turley/BT Commercial said. Twitter is looking at space in San Francisco, according to Jones Lang LaSalle, its broker.
Twitter Tax Breaks
San Francisco Mayor Edwin Lee offered tax breaks to Twitter and other firms that relocate to an area near City Hall known as Mid-Market, Christine Falvey, the mayor’s spokeswoman, wrote in an e-mail.
“We think we have made a very good proposal to Twitter to stay in San Francisco and expect a decision soon,” Lee said in an e-mailed response to questions. “This can be a transformative moment for our Mid-Market area and a definite win-win.”
Kabam, a developer of games for websites including Facebook, signed a lease for 25,000 square feet in a South of Market office building that will accommodate 150 new employees, Lee announced today.
South of Market
While large companies fill big buildings, startups also are flocking to San Francisco from around the country to be near like-minded firms. They desire office space in the South of Market district, an area of warehouses and industrial buildings that was home to the dot-com boom in the mid-1990s, said Shelby Clark, founder of RelayRides Inc.
“The talent, access to capital, mentality and just the entire ecosystem is really second to none,” said Clark, whose company, backed by Google Inc. (GOOG)’s venture arm, is a rental-car service that lets users lease their own vehicles for cash.
RelayRides, originally based in Cambridge, Massachusetts, is relocating this week to a 3,000-square-foot space on Bryant Street near Current TV LLC. ModCloth Inc., which sells vintage clothing online, moved from Pittsburgh, and Formspring.me Inc., which runs an online forum where users ask and answer queries, came from Indianapolis.
Asking rents in South of Market rose 9.5 percent to an average $31.92 a square foot per year, according to Jones Lang LaSalle. That compares with a 6.2 percent increase to $38.37 in the city’s financial district, a number that reflects landlords’ anticipation for technology-industry spillover, not current demand, said Colin Yasukochi, the broker’s research director.
‘Stimulating Other Growth’
“Tech will eventually demand services from law firms, service firms, marketers and recruiters,” Yasukochi said. “Their growth is stimulating other growth.”
The vacancy rate has to go below 10 percent before rent growth accelerates, said Kenneth Rosen, chairman of Berkeley, California-based Rosen Consulting Group and hedge fund Rosen Real Estate Securities LLC. San Francisco has the advantage of being the fastest-moving U.S. office market, he said.
“When things get good they get good rapidly,” Rosen said.
The real estate expansion isn’t limited to office leases. Salesforce paid $278 million in November for 14 acres (5.7 hectares) of empty land in San Francisco’s Mission Bay area, south of South of Market, where it intends to build a campus.
Facebook, the biggest social-networking site, in January bought a 22-acre site in Menlo Park, California, adjacent to Sun Microsystems Inc.’s former campus of 1 million square feet. Facebook, with 500 million users, said it would move its headquarters from Palo Alto to the campus, 30 miles south of San Francisco, and lease it from Deutsche Bank AG’s RREEF property investment unit.
In San Francisco, last year’s growth was led by Zynga Inc., the biggest maker of games on Facebook. The company will move in the next three to six months to its new 270,000-square-foot headquarters, taking almost half a building originally constructed as fashion showrooms. The 10-year lease was the city’s biggest office deal of 2010.
“This is not ‘Son of Dot-Com,’” said Michael Covarrubias, chief executive officer of San Francisco-based TMG Partners Inc., Zynga’s landlord at 650 Townsend St. The building stretches from Seventh to Eighth streets and is located across from the San Francisco Design Center. “These are well-heeled companies, with senior management, making real money.”
Zynga is valued at $6.2 billion and Twitter is worth $4.3 billion on SharesPost Inc., an exchange for shares of private companies.
Zynga will pay $23 a square foot in annual rent on a lease expiring in 2020, Jones Lang LaSalle said. TMG is installing a separate entrance and enlarging a seven-story atrium, among other improvements.
Adam Isserlis, a Zynga spokesman, declined to comment on the lease details. Carolyn Penner, a Twitter spokeswoman, didn’t respond to e-mails seeking comment.
Trulia Inc., the operator of a residential real estate website, in January tripled its space by moving to 30,000 square feet in a South of Market building near the San Francisco Museum of Modern Art and Moscone convention center.
“There are numerous health clubs, tons of restaurants and many, many more startups, which really facilitates the flow of business,” said Rebecca Eisenberg, the company’s chief counsel.
Broad Street San Francisco LLC, Trulia’s new landlord, gave it a tenant allowance that helped fund a roof deck and kitchens on all three floors, said Ken Shuman, a spokesman for the website. The annual rent is $27 a square foot, he said.
Dolby Laboratories Inc. (DLB), whose audio technology is used in movie theaters and home stereos, is seeking 300,000 square feet in San Francisco, Jones Lang LaSalle said. Its current headquarters is in the Potrero Hill neighborhood near Trulia’s old home.
While tech grew, financial firms had nine of the 10 biggest space cuts in 2010 and relinquished 2 million square feet in the last three years, according to Jones Lang LaSalle. Banks slashed enough positions since 2008 to fill San Francisco’s iconic Transamerica Pyramid four times, said Frank Fudem, a partner at Cassidy Turley/BT Commercial.
Lost financial jobs through December totaled 9,500, or 14 percent of the industry, said Ted Egan, chief economist in the city controller’s office, citing California Employment Development Department data for the San Francisco metropolitan area. It was the biggest drop since an 18.5 percent decline from 2001 to 2005.
Last year alone, banks cut more than 1 million square feet, led by Wells Fargo & Co. (WFC) vacating a 349,000-square-foot building on Fifth Street. BlackRock Inc. (BLK) cut 113,000 square feet on Fremont Street, and Charles Schwab Corp. (SCHW) and Deloitte LLP each gave up 100,000 square feet on Montgomery and Fremont streets, respectively, according to Jones Lang LaSalle.
“San Francisco has industries that can surge, like Internet, social media and biotech,” Rosen said. “I have every expectation that will happen.”