It took Kilroy Realty Corp. three days to nail down the major points of an almost two-decade lease for Salesforce.com Inc. at the property company’s new San Francisco tower. A final agreement was signed within five weeks.
“That’s probably the fastest transaction we’ve ever done of that size,” said Chief Executive Officer John Kilroy of the 2012 deal. The 30-story building is now rising in the city’s booming South of Market neighborhood, where at least 12 other office properties are planned or under construction.
San Francisco real estate developers are planning to add more than 8 million square feet (743,000 square meters) of office space in the next four years, the equivalent of 16 Transamerica Pyramids, and are betting on strong demand from technology tenants to fill it. While companies such as Salesforce and Uber Technologies Inc. have already reached deals for some of those towers, the pace of construction may make landlords vulnerable as they increasingly depend on an industry known for its booms and busts.
San Francisco is one of only three markets in the U.S. where the coming office supply is forecast to outpace tenant leasing this year and next, according to Reis Inc., a real estate research company. The others are Houston and Fort Worth in Texas, where developers added new offices amid growth in the energy industry, which is now being hurt by a plunge in oil prices.
In San Francisco, about 2.1 million square feet will come to the market this year, the most since 2002, Reis data show.
“There is just a lot of supply coming online in a short period of time,” said Ryan Severino, a senior economist at New York-based Reis. “It’s not going to be as easy for developers going forward as it was in the last four to five years, when you essentially could do no wrong because there were no new developments.”
Construction cranes dominate the skyline in the South of Market area, where crews are working on office towers as well as luxury condominiums and a new transit center. At 415 Mission St., across from the Kilroy building, Boston Properties Inc. and Hines are developing what will be the city’s tallest skyscraper, about 50 percent leased to Salesforce.
Nearby, developer Jay Paul Co. is erecting a 684,000-square-foot office and condo project, while New York-based Tishman Speyer is building a 26-story property for LinkedIn Corp. Further south, in the Mission Bay area, Alexandria Real Estate Equities Inc. is constructing offices for Uber, the six-year-old car-booking company that is valued at about $40 billion.
With startups such as Uber fueling a booming technology industry that’s reshaping San Francisco -- propelling not only office values but a surge in housing costs -- there’s reason for developers to be optimistic. Office leasing climbed 24 percent in 2014 from the prior year to 9.55 million square feet, CBRE Group Inc. data show. About 93 percent of the offices slated for completion in 2015 are pre-leased, according to the broker.
Salesforce alone has had a voracious appetite in the market, poised to have more than 2 million square feet of space as the city’s largest tech employer. In addition to leasing the two new towers, the maker of customer-management software agreed in November to buy 50 Fremont St., an existing 41-story building.
“Our urban campus keeps us close to our customers and allows us to support our local neighborhoods,” Ford Fish, Salesforce’s senior vice president of real estate, said in an e-mail. “It’s exciting to see other companies follow our lead.”
Over the past two years, more than 80 percent of new office demand was driven by technology companies, according to Colin Yasukochi, director of research and analysis for Northern California at CBRE. The share is almost twice that of the dot-com boom of the late 1990s, when the financial, legal and media industries were rapidly expanding as well, he said.
“The office market in San Francisco is strong,” Yasukochi said. “One cautionary point to raise is how dependent this market is on the tech industry.”
If demand diminishes, “there is no alternative as most non-tech companies have been reducing their office footprints and getting more efficient,” he said.
Reis estimates that developers will deliver 32 percent more office space than the square footage being leased this year and 16 percent more in 2016. The data are based on such factors as historic market performance and expected office employment.
Boston Properties’ 61-story Salesforce tower, set to be completed in 2017, is about half unleased, as is all of the commercial space at Jay Paul’s planned mixed-use project a block away. That represents the lion’s share of office space not yet spoken for in the city right now. Four other office projects are planned and expected to start construction in 2015 that don’t have officially committed tenants, CBRE data show.
Arista Joyner, a spokeswoman for Boston Properties, didn’t return a phone call and e-mail seeking comment. Kelly DeWees, construction manager at Jay Paul, also didn’t return messages.
With multibillion-dollar valuations for startups becoming more frequent, from Uber to Snapchat Inc. to Pinterest Inc., some investors are starting to warn of a downfall. Dallas Mavericks owner Mark Cuban, who made his fortune founding and then selling Broadcast.com, and Todd Dagres, a founding partner at venture-capital firm Spark Capital in Boston, have said the industry is in a bubble.
A slowdown in the market could create a glut of offices as companies eliminate jobs and seek to sublet extra space, said Jeffrey Langbaum, an analyst at Bloomberg Intelligence.
“We saw this at the beginning part of the financial crisis in New York when big banks had leased all that space and a ton of it came on the market as subleases,” he said.
The last tech boom in the late 1990s and early 2000s resulted in a bigger building frenzy than today, with more than 4 million square feet of offices added annually, according to Reis. The current surge is generally considered to be different as most of today’s best-known names produce real revenue, are growing fast and rank among the top three in their businesses.
The new towers might be a hard sell for the city’s smaller to medium-sized technology companies, which have favored older buildings with large floor plates, exposed brick walls and outdoor space, said Christopher Roeder, San Francisco-based international director at Jones Lang LaSalle Inc.
Many smaller tech companies also may not be able to afford new buildings in central locations. Rising land and construction costs have made office development more expensive, pushing builders to charge higher rents to make their projects financially viable, according to CBRE’s Yasukochi.
“As rents go up, some companies will decide to go elsewhere to find better cost of space,” said Bill Cumbelich, executive vice president at CBRE.
Uber opted for Mission Bay, to the south of the bulk of construction. The company and Pasadena, California-based Alexandria Real Estate are in a joint venture for a 423,000-square-foot project, which will have two midrise buildings next to the Third Street rail line and adjacent to the new Golden State Warriors basketball arena.
“As we looked at the landscape of properties in San Francisco, Mission Bay -- uniquely situated within a highly innovative and urban neighborhood -- made a lot of sense as the location to expand our headquarters,” Trina Smith, an Uber spokeswoman, said in a statement.
Alexandria, which has about 1 million square feet of office space in Mission Bay that is 100 percent leased, is looking to push the neighborhood’s boundaries. The company a year ago bought a land parcel that can support a 300,000-square-foot project on the northwestern part of Mission Bay that it will probably turn into an office project, according to Chief Operating Officer Stephen Richardson.
Los Angeles-based Kilroy is also planning to break ground in June on a $450 million speculative office project in the neighborhood, featuring two six-story and two 12-story buildings. Its 450,000-square-foot building for Salesforce, featuring a basket-weave facade, is set to be completed this year.
Ultimately, the diversity of today’s technology companies may help make the San Francisco market a safer bet for developers than it was during the last technology boom, according to John Kilroy.
“You have to remember that technology is in every business now,” he said. “It really doesn’t matter what you’re doing. Whether you’re selling automobiles or whether you’re a diagnostic company. So when you talk about tech it’s a much broader type of company than it’s ever been.”