Oct. 16 (Bloomberg) -- Two years ago, San Francisco offered a payroll-tax break to keep Twitter Inc., then with 400 employees, from moving its headquarters out of town. The gamble has since paid off, spurring other technology companies to choose the city as their base and boosting the local economy.
The social-media company, now with 2,000 workers, is seeking to raise $1 billion in an initial public offering of shares, people with knowledge of the matter have said. The move is likely to create more millionaires, jobs and technology investment in California’s fourth-largest city, while driving up housing prices that will force some residents to move out.
“You’re going to have a lot of people who are made wealthy when Twitter goes public and, presuming the stock price continues to go up, who are going to have resources to invest in another generation of technology startups,” Ted Egan, chief economist in the San Francisco controller’s office, said in a telephone interview.
The most-anticipated technology-company IPO since Menlo Park-based Facebook Inc. is part of a surge in technology companies moving to and opening in San Francisco that drove down unemployment to 5.6 percent in August from 9.7 percent three years earlier. The development has also pushed up commercial and residential rents and aided a revival of a blighted downtown neighborhood.
Karen Wickre, a Twitter spokeswoman, declined to comment on the effect the offering will have on the city’s economy, citing a regulatory quiet period before the IPO.
“Housing is totally out-of-control expensive now and the kind of hyper gentrification of San Francisco is gathering steam,” said Gabriel Metcalf, executive director of the San Francisco Planning and Urban Research Association, better known as SPUR, a nonpartisan urban policy organization.
“That’s because the size of the employment boom relative to the size of the housing stock is out of whack, coupled with decades of making it difficult to build housing,” Metcalf said.
“The IPO itself won’t literally just by itself change housing costs, but it’s part of this bigger wave of demand for housing that’s really made costs out of sight,” Metcalf said.
San Francisco packs a population of more than 800,000 onto the tip of a peninsula. The city is just seven miles (11 kilometers) long and seven miles wide. At about 18,000 people per square mile, it’s the most densely settled major U.S. city behind New York.
The median home price jumped 18 percent to $825,000 in August from $700,000 a year earlier, according to DataQuick, a San Diego-based real-estate data provider. The median for existing condos soared to $810,000 from $630,000 in August 2010, while existing single-family detached homes rose to $870,000 from $688,000.
“There’s nothing available, so housing prices go through the roof,” said Egan, the city’s economist. “There’s been a very robust amount of housing construction, but it has not yet had the effect of denting the growth in housing prices.”
Twitter in 2011 considered leaving San Francisco, telling Mayor Ed Lee in a meeting that a city tax based on the size of the company’s payroll would erode its growth. Months later, San Francisco had exempted Twitter from the payroll tax and made the same offer to other companies willing to relocate to Central Market, an area plagued by crime and empty storefronts within blocks of City Hall. Twitter moved into a renovated 1930s furniture mart there in June 2012.
The company is in talks to lease a 320,000-square-foot office adjacent to its headquarters, according to people with knowledge of the discussions. That would more than double the company’s current footprint of 295,000 square feet, data from broker CBRE Group Inc. show.
Other companies have since followed Twitter’s example. Since April 2011, 15 technology companies have located in the Central Market area, including mobile-payment service Square Inc. and online retailer One Kings Lane Inc., according to Todd Rufo, director of the city’s Office of Economic and Workforce Development.
“They’ve single-handedly helped revive a depressed area of San Francisco by moving their headquarters to Mid-Market,” Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the Haas School of Business at the University of California, Berkeley, said of Twitter.
“So the IPO will provide money for their corporate growth,” allowing them to add staff, Rosen said by telephone.
To be sure, the influx of highly paid workers will continue to drive up rents and force people with more moderate incomes to move out.
“It does mean that if you’re not getting paid really well, you might be squeezed out of San Francisco,” Rosen said. “It’s a ‘have-have not’ situation. Overall, it’s good for the city, but some people will lose out in this process.”
San Francisco had the fastest job growth from 2011 to 2012 among U.S. counties with a labor force of more than 250,000, driven by a 12 percent increase in the information sector, according to the controller’s office. The national average for all industries was 1.9 percent, it reported.
Asking rates for office rents in the city have increased 77 percent to an average of $53.84 a square foot per year, from $30.50 in the first quarter of 2010, according to CBRE data. The office vacancy rate has fallen to 8.2 percent from 16.2 percent in that time, the data shows.
The Twitter IPO is unlikely to make the splash of Facebook’s share auction, said Jason Sisney, state and local finance analyst in the California Legislative Analyst’s Office. A report it issued in May 2012 said Facebook’s IPO would probably bring the Golden State about $2.1 billion in taxes.
The state won’t issue a tax revenue estimate on Twitter’s sale since it’s “more modestly sized” than Facebook’s, Sisney said by e-mail.
For Twitter, “the way that states like California estimate revenue, collections from IPOs of this size and type are already ‘cooked into the model,’” Sisney said.
IPOs prompt more technology investment in the Bay Area, SPUR’s Metcalf said.
“In the long run, successful IPOs are the seedbed for further rounds of innovation and startup activity because people reinvest the money in new companies,” he said.
“Part of the magic of the Bay Area economy is these angel investors and venture funds that are recycling the profits from previous IPOs,” Metcalf said.
To contact the reporter on this story: Alison Vekshin in San Francisco at firstname.lastname@example.org.
To contact the editor responsible for this story: Stephen Merelman in New York at email@example.com.