Whether it’s Facebook or Google, WhatsApp or Spotify, San Francisco and Silicon Valley have long been the world’s most famous playgrounds of the tech set. In this US special, Emily Wright reports from the Bay Area on property trends, the latest start-up spaces and California’s growing love affair with London
It’s not all bouncy ball chairs and bring your puppy to work day in San Francisco.
That’s not to say this isn’t a happy by-product of the desires and whims of the area’s key occupiers. We’re talking about the tech centre of the world here. The San Francisco/Silicon Valley area is home to around 3,500 venture capital backed start-ups – nearly 1,500 more than New York, which comes in a not-even-that-close second – and the Bay Area has attracted over $30bn (£19bn) of venture capital investment since 2009. That’s a serious amount of money. Certainly enough to get you a lot of bouncy ball chairs. And, one would imagine, a lot of puppies.
But there is a much bigger story to tell. While the Bay Area tech sector is the driving force behind the region’s real estate performance, a number of other key factors are pushing this growth forward in this part of the world at a phenomenal rate. Thanks to a healthier global economy and the departure of San Francisco’s formally construction-shy mayor Gavin Newsom in 2011, the real estate market in the Bay Area has exploded.
There is 2.2m sq ft currently under major renovation, while 1m sq ft is under construction in San Francisco – now ranked fifth in Cushman & Wakefield’s list of the best cities in the world for investment opportunities in 2013-14 – and rents in the Valley are on the up as start-ups race for space.
In short, a growth spike in the Bay Area’s legendary tech sector looks set to collide with the region’s biggest real estate push in a decade. To find out what this could mean, Estates Gazette toured the region from San Francisco down the peninsula to San Jose to find out how tech and non-tech firms alike are positioning themselves for the future, and what the potential knock-on effect could be here in the UK.
Backing up the trucks
After a nigh-on 10-year dearth of construction there are now nearly 150 projects currently being built in San Francisco alone and 145 more have just been approved. In the Valley, asking rents are rising by an average of 3.4% quarter on quarter and strong demand twinned with low vacancy rates – particularly in Palo Alto and Menlo Park – has highlighted a need for fresh stock.
The fact that this explosion of real estate activity has come at a time when the current tech boom – powered by apps, social media and the switch to mobile – has reached fever pitch is quite something. “Tech is everything and everything is tech,” says JD Lumpkin, executive director of C&W’s Bay Area office. “Soon everything will have a tech element, not just pure tech companies. People understand that in San Francisco and Silicon Valley. That’s why people are backing up trucks with capital to deploy here.”
It helps that the area is already home to the biggest names in tech – and, by default, in business. Major ?anchor tenants will always attract interest and the Bay Area basically has them all.
But there is a very different type of demand and resulting product required in San Francisco compared with Silicon Valley, so it make sense to look at the two separately.
San Francisco
There has been a long-held opinion that the tech focus is shifting from Silicon Valley to the city. Particularly as people who work for tech start-ups tend to prefer city life: “The day that Google, LinkedIn and Facebook had to start bussing staff down to the Valley from the city (free, private Wi-Fi-equipped buses pick up staff from the city and shuttle them down to the campuses of the Silicon Valley tech giants) was when it all changed,” says Duncan Logan, chief executive of RocketSpace – a start-up that launched in San Francisco in January 2011.
“These firms – the old guard – are increasingly having to offer perks and need to carry people from door to door to get them in at all. Companies based in San Francisco can use this as a bargaining tool. We can say ‘that hour-and-a-half of your day you spend on the bus travelling to work, we can eliminate that for you’.”
As the key start-ups, including Twitter, Uber and Square, move closer to the centre, a snowball effect is beginning to build up. Now just under 35% of C&W’s San Francisco requirements are from tech firms.
And the wider impact is significant. Lumpkin explains this influx actually means that it is no longer just pure tech occupiers desperate for space in the city: “In the way New York or London is where you have to be for finance, San Francisco is now where you have to be for tech.
“I just worked with clothing company American Eagle on a 10,000 sq ft deal for its online division. It opened that here in San Francisco even though it is based in Pittsburgh. It felt being here was crucial to see how the online retail world works. Similarly, Macy’s has its HQ in Ohio but Macys.com is here. Walmart.com is here.”
Paul Paradis, managing director of developer Hines, adds: “This is happening in the Valley too. You now have VW and Toyota down there. In San Francisco we have traditional occupiers now all looking for more tech-style space to accommodate fresh, new ?tech-minded staff.”
A prime example is the Transbay Tower – a new 1,000ft skyscraper that Hines is developing with Boston Properties. The building, due to complete in 2016, will become the tallest on the West Coast and will be connected to Transbay Transit Center – a huge infrastructure project set to be the “Grand Central of the West” due to complete a year later. It will, for the first time, link San Francisco’s two major modes of transport – the BART (underground) out to the East Bay and the Caltrain overland down through the Valley.
“We want to create an entirely new city centre in San Francisco,” explains Rod Diehl, senior vice-president of leasing at Boston Properties. “And this project will do that.”
The scheme is an example of how local developers are increasingly catering for ?both tech and non-tech occupiers. The lower levels – with bigger floorplates and ?less impressive views – will be aimed at tech start-ups, while the top floors will be more appropriate for bigger, ?richer occupiers and will reach ?top-level rents of around ?$90 sq ft.
And this is high for the area. “Office space here is an absolute bargain at the moment,” says Paradis. “That’s why everyone wants to get in now.”
Indeed, the average stands at around $50 per sq ft – a mere £30. To put that into context, an example of the type of space going for these average rents is a 60,000 sq ft former rave warehouse currently being converted into a 36,000 sq ft new HQ for tech start-up Weebly. It will become home to 400 employees and will feature a three-storey lobby entrance with 50ft-high ceilings, a full dining area and bar, film screening room, sound studio, fitness centre with yoga and massage rooms, a spa-grade showering facility including laundry services, a bike barn, a speakeasy and a roof deck.
Not bad. Not bad at all.
Silicon Valley
Just over an hour down the peninsula on the Caltrain and it’s a different world. More spread out, suburban and distinctly less buzzy, the former Mecca for all things tech and start-up is now in serious competition with San Fran. But that does not mean it is a zero-sum game. Stanford University is just down from Palo Alto and plenty of the next bright young things hop easily and happily from college campus to tech giant campus.
And that’s the thing about campuses. Some of the biggest and best-known tech firms need to be based along the Peninsula – Facebook and Google in Mountain View, eBay in San Jose. They will all continue to need sprawling space for campuses and offshoots that wouldn’t be doable in San Francisco. And some of the most important meetings with venture capitalists still happen in the plush drawing room and bar ?of the Rosewood Hotel in Menlo Park.
Most importantly, activity is not slowing down. Space in Palo Alto – the nearest major tech hub outside of San Francisco – is achieving high rents of $70 per sq ft a month – that’s for 200 sq ft above a mattress store. ?C&W’s executive managing director/managing broker Silicon Valley and Peninsula Jeff Cushman explains: “Look around this coffee shop right now. You can’t find a seat. It is full with young people with laptops, probably all start-ups. Silicon Valley remains the epicentre of the Bay Area tech sector. I think it’s important that San Francisco and Silicon Valley present themselves as a single entity to the rest of the country and the world. A centre for tech innovation.”
What the Valley offices and sites lack in proximity to a city centre, they more than make up for in sheer space. There is constant demand from companies such as Google, LinkedIn and Facebook as they expand. One example is the new Google Glass building – a 1.5m sq ft building and former shopping mall for just one arm of the company’s operations.
Larry Grondahl is a senior architect at AP+I Design – one of the many Bay Area architects with whom Google regularly works. “The amount of space these guys need is amazing,” he says. “They work very fast. It is not unusual for plans to need changing at the last minute to be made more ‘Google’. But it’s the sheer volume of space and plans for more expansion among these big Silicon Valley firms that is just incredible.”
London calling?
The really good news is that as the Bay Area tech sector continues to soar, start-ups and bigger tech firms are thinking about expansion. And London is top of the list for many.
“There is a great link between the London and the Bay area,” says Cushman. “But the UK needs to change its attitude. The firms eyeing the UK market have no security. They don’t want long leases. Entrepreneurial developers in the UK will come away as the winners – the ones who are prepared to rethink lease structures.”
Whether this will sit comfortably with the UK property sector remains to be seen. But it is something to think about as the Californians start eyeing London.
