Office kegs, trampolines, rooftop bars, artistic aesthetics, hued lighting, and electric car parking are just a few of the unconventional requirements tenant representation agents are asked to find for their tech company and startup clients. San Francisco’s commercial real estate brokers who specialize in tenant representation are given a tall order to accommodate the demands of start-up culture for the influx of companies moving into the city. Over the past 20 years, San Francisco has pivoted from a conventional banking and financial hub with classical architecture and conservative offices to today’s technology capital with innovative and creative office environments.
In conjunction with certain legislation, tenant representatives have been the quiet backbone behind San Francisco’s office space improvements. Tenant reps have access to the best quality tenants that landlords covet: Uber, NerdWallet, Dropbox, Splunk, Pinterest, and 1-800-GOT-JUNK all use the services of tenant reps to find premier office spaces in San Francisco. This has caused an ‘arms race’ for city landlords–competing for the best tenants in the market. Landlords are providing full build outs and exceptional amenities to attract high-class tech tenants, enriching and upgrading the quality of San Francisco commercial office spaces.
Classical buildings are now being converted into highly creative tech centers that inhabit the world’s most technologically advanced products, minds, and ideas. This change in San Francisco’s commerce has turned some of the city’s poorest neighborhoods and oldest buildings into the most profitable and sought-after commercial real estate in the world.
Today, we are seeing office rents exceed $80 per square foot per year in some districts in the city. South Park, 30 years ago, could not command $40.00 per square foot annually. Now, some spaces are being leased between $80.00 to $100 per square foot annually. The resulting high rents provide owners with skyrocketing property valuations.
Recently, 3180 18th Street in the Mission sold for $31,700,000. This same building was purchased in 2012 for only $5,600,000. That’s a sizable return on a mere $5,600,000 investment. Not bad for a 37,000 square foot, class B office building that was built in 1902. In this particular instance, a new ownership group came in, performed numerous capital improvements, and leased the building to the non-profit OpenAI, an artificial intelligence company with a 1 billion dollar endowment, co-founded by Elon Musk and Sam Altman. That particular lease value alone was $29,774,904.46
Tenant representatives have witnessed first-hand the change in average office requirements. Previously, office space inquiries addressed traditional requirements: divisible offices, cubicles, office intensive layout and reception in the entry – configurations you would typically see on AMC’s Madmen. Now, in San Francisco, the majority of tenant searches focus on creativity: high ceilings, vibrant natural light, brick and timber aesthetics, open floor plans, call booths, and abstract amenities – configurations you would normally see on HBO’s Silicon Valley. Brokers in the industry have seen it all: slides, trampolines, rock climbing walls, rooftop hot tubs, full bars, basketball courts.
Neighborhoods also play a significant role in commercial tenant space requirements. Traditionally, office space searches concentrated in nearby areas around the financial district: Jackson Square, Waterfront corridor, SOMA, Civic Center, and the Van Ness Corridor. Today, we are getting a flood of inquiries for space in the Mission, South Park, Mission Bay, Potrero Hill, Dogpatch, Hayes Valley, North Beach and more. The Premiere businesses and tech companies in San Francisco are now expanding across the breadth of the city, including excluded neighborhoods and districts into the arrival of new commerce.
Expansion does come at a price. Community groups and other organizations are pushing back against the startup culture and the commercial gentrification of San Francisco’s many neighborhoods. They have stated their opposition to rampant growth, emphasizing that we should preserve the working class roots being priced out of the City such as industrial warehouses in Dogpatch, auto body shops in SOMA, and mom and pop stores in the Mission. In response to neighborhood opposition, San Francisco has restricted office uses by enacting zoning use restrictions such as PDR (production, distribution, and repair) for certain designated areas. Landlords in these restrictive areas have a more difficult time participating in the frenzied rent escalations available to more zoning friendly areas. A landlord leasing space to a nonconforming user may be heavily penalized. All it takes is a simple complaint to the city, and a landlord may be forced to evict a nonconforming tenant and incur penalties.
Despite the push back and concerns raised from community activists and other neighborhood organizations, San Francisco-Bay Area remains the foremost location to draw tech-related talent. Due to its proximity to Silicon Valley, major tech firms continue to build futurist headquarters that bolster their creativity and lifestyle. Employers use their office space, with the many amenities, aesthetics and built-in fun factor, as a recruiting tool to draw the top talent in the country.
Employment recruiting effects have caused other major markets to keep up with the changing landscape of San Francisco’s office environment. We are starting to see an influx of similar space layouts and tenant improvements being implemented in other tech markets like Chicago, Seattle, Los Angeles, Phoenix, and Vancouver. The less expensive prices of office space in emerging markets have caused some San Francisco based tech companies to explore transferring their headquarters and major operations to other areas. Video conferencing, high-speed communication, screen sharing, and all types of videotelephony is making it easier for one company to work cohesively from many different markets.