| By Sharon Simonson |
Silicon Valley may struggle more than ever to retain its mantle as the epicenter of technological innovation in the Bay Area.
More and more local observers believe San Francisco will usurp the South Bay as the region’s cradle of life-changing technical progress, according to an informal survey by brokerage Colliers International conducted in real time on Nov. 1.
In the survey of more than 100 people, half said they believed that by 2017 San Francisco—not Silicon Valley—would “be thought of as the center for technology innovation.” A year ago, two-thirds of the respondents to the same query in a similar Colliers survey predicted that Silicon Valley would keep the perch.
The rapid change echoes the life experience of venture capitalist Matt Cohler, general partner at Benchmark Capital. Cohler was a member of the founding team of LinkedIn Corp. and the seventh employee of Facebook Inc. Benchmark was an investor in Instagram, a photo-sharing service that recently sold to Facebook for $1 billion.
When he headed for the Bay Area in 2001 to find his fortune after a childhood in New York City and college at Yale University, he never considered living or locating in San Francisco, Cohler said. “I only came to San Francisco four or five times in the first several years I was here,” he said.
Likewise, he said, “When we were moving into our first office in downtown Palo Alto with Facebook, it never occurred to us to look in San Francisco. And that was at the beginning of 2005.
“Certainly at LinkedIn, we moved to Palo Alto and Mountain View, and we never for a minute considered San Francisco.”
But Benchmark itself is now opening a 10,000-square-foot office at 988 Market St. in San Francisco at the top of The Warfield, a historic theater, Cohler said. The location is in the heart of the Mid-Market district and its tax-break-driven revival. “This is where the entrepreneurs and the companies have gone, and we looked at our own portfolio, and we discovered that in the last several years we have made two investments in a San Francisco company for every one in Silicon Valley,” he said.
Cohler was one of two keynote speakers Nov. 1 at “Landscape 2013: Real Estate Beyond the Obvious,” an annual program presented by Colliers International in partnership with The Registry. John Kilroy Jr., chief executive of Kilroy Realty Corp., also appeared. Both men were interviewed by Adam Lashinsky, author of “Inside Apple: How America’s Most Admired—and Secretive—Company Really Works” and senior editor at large for Fortune magazine. “We went from zero [ownership of Bay Area properties] 30 months ago to about $2 billion invested in the area, most of it in the city,” Kilroy said. “We have announced $1.1 billion of additional investment, and most of it is up here.”
Technology companies dominate the San Francisco leasing market as never before, said Alan Collenette, Colliers’ executive regional managing director for San Francisco and Sacramento. The brokerage projects that the city will see 8.1 million square feet of leasing by year’s end, he said. An estimated 63 percent will be by tech-related companies. In comparison, tech companies accounted for not quite 40 percent of leasing in 1999 and 2000. Those boom years for the San Francisco office market saw 8.9 million square feet and 13.3 million square feet of gross leasing activity, respectively, according to Colliers research.
Tech’s dominance has fueled rising rents South of Market Street, where so-called creative enterprises have gravitated, and depressed rents in the Financial District, Jackson Square and the North Waterfront, Colliers research shows.
Class A office buildings in the North Financial District that drew $81 a foot a year for full-service space in 2000 today garner $48 a foot. That’s less than the rents for both Class A and Class B buildings South of Market where they draw $50 a foot.
Landlords with buildings that can’t adapt to the new realities of the technology workforce face owning “a wasting asset,” Kilroy said. His company has looked at “a lot of buildings north of Market [Street],” but has not bought. While bay views and a site near a BART station remain strong assets, “a lot of stuff north of Market has become a commodity,” he said.
Moreover, brokers tell him that more traditional tenant classes including law firms are also looking to lower occupancy costs and are adopting greater employee densities too, lowering aggregate square footage demand.
Technology companies also are driving their buildings hard, packing in employees and relying heavily on public transit to reduce the demand for parking. “We have done densities at 13 per 1,000 feet up and down the West Coast,” Kilroy said.
Buildings need particular features to meet that kind of use, affecting mechanical systems, elevator capacity, electricity wattages per square foot and the weight-bearing capacity of each floor. “We look at a building’s physicality—all of those things that go into a building that has legs for the future,” Kilroy said.
Benchmark’s Mid-Market Street location puts him within walking distance of Twitter’s new offices, where he and his partners sit on the board of directors, Cohler said. It also puts Benchmark executives within walking distance of multiple additional companies in which they have interests.
Cohler declined to release exact details of Benchmark’s return on its Instagram investment. The venture firm put in “about $7.4 million” and was the largest shareholder. Under questioning, he agreed that it would not be “way off” to say Benchmark took in $200 million from the sale.
San Francisco has gained ascendance for technology companies for three reasons, Cohler said. Google Inc. conquered the Silicon Valley commute when in 2007 it introduced its famous luxury shuttles. That opened the possibility for tech workers to live in San Francisco. On-demand computing capacity offered by companies such as Amazon has freed start-ups to locate more comfortably in more places, and the rise in importance of design not only in the world of consumer goods but also for the enterprise.
“Everyone has high expectations about how good services will be, and that means designers who once-upon-a-time were second-class citizens in tech start-ups are now royalty, and those kinds of people like to live in the city,” he said.
He is not eager to see more money dedicated to venture capital investment right now, he said. It is a mistake to view this form of investment as simply another asset class. “We in our world are constrained by the number of great ideas,” he said. At some point, more venture money thrown at that limited universe simply means more money is lost.
At the same time, he said, he is convinced that the tech world is on the precipice of its next big change: a titanic shift toward mobile computing as the ubiquity of smart phones reaches a critical level. “In the next six months, the tipping effect is going to happen, and when it happens we are going to see a sea change,” he said. “Instagram was the earliest example of a product that was truly native to this [mobile] environment. It didn’t feel like it had been translated into a new medium.”
As far as real estate costs and their acceptable level, he doesn’t single out rent as an expense but rather evaluates it as a cost along with salaries and benefits. “I like to see that cost between $15 [a month] and $25 a month in net cash burn per employee,” Cohler said. If that cost rises above $25 a month, it is too high, he said, and “we are probably doing something wrong.”