The San Francisco-Silicon Valley region experienced a sizzling 2013 in real-estate development and job growth that were fueled by a young technology crowd. More of the same is forecast for 2014 although the pace will not be quite as dizzying.
San Francisco and Silicon Valley will also increasingly become symbiotic as tech companies from the Peninsula to the South Bay continue to beef up their office presence in the big city in an effort to attract highly skilled employees who are seeking the urban lifestyle.
Tempering the enthusiasm somewhat are factors that include rising interest rates and a shaky confidence from small companies concerned with the high cost of doing business in California.
Still, “the trend from an office standpoint in this very special geography that we sit in is incredibly positive,” said Carl Shannon, senior managing director for New York-based developer Tishman Speyer. “We’re blessed in San Francisco to have an economy which has overcome the shrinking that is going on in corporate America.”
Driving that economy is the tech sector’s continued expansion, he said. Within that sector are those in their 20s, 30s and 40s who want to live in and around a vibrant city center, which San Francisco is.
Jeff Cushman, executive managing director of New York-based commercial real-estate services firm Cushman & Wakefield, predicts that interest rates will go up but not enough to scare developers and property owners.
“The owners and landlords still see upside in the [office] rents, although I think the rents are going to moderate compared with the last two to three years,” Cushman said. “What I would be worried about more if you’re an owner or developer, particularly a developer, would be construction. I think the steel prices in construction … and labor will probably worry me more than what might happen with interest rates.”
Shannon sees full-service gross rents reaching into the low $80 range per square foot annually in San Francisco. But the rising rents won’t scare off the big tech tenants, either.
“The tenants that matter are not incented by saving rent,” Shannon said. “It’s all about: How am I getting employees? Rents are a very small portion of their [expense].”
The strong tech sector will also continue to spur condominium development in San Francisco. The echo-boomer demographic tide, demand for housing in a chronically “under-supplied market” and other factors have “made first apartment construction and now condominium construction possible in a way that’s really not happening elsewhere in the country,” Shannon said.
Indeed, Tishman Speyer is in the forefront of that condo charge. It has teamed up with Chinese developer China Vanke to build a 655-unit, high-rise condo at 201 Folsom St. It has been billed as the largest residential development project ever in San Francisco.
Shannon, Cushman and other business experts shared their real-estate market insights and prognostications as part of a panel discussion in San Francisco last week.
The other panelists were Ken Gitlin, senior vice president of operational support for professional-staffing firm Robert Half, and Tim Quinlan, an economist for Wells Fargo Securities. David Nelson, director of international corporate properties for Wells Fargo, served as the moderator for the forecast event in San Francisco organized by the Northern California chapter of CoreNet, a corporate real-estate association, on January 16th.
Panelists agree that San Francisco and Silicon Valley are more interconnected than ever before because of the surge in the tech arena. “They are really one integrated market today,” Shannon said.
“It’s very symbiotic,” Cushman added. “I think both are winning. I feel very good about the fact they can work together. At the end of the day, the most interesting company in the world is [in Silicon Valley]—Google, [but] they will continue to grow in San Francisco.”
But while the large tech companies are booming, Gitlin said California’s small-business sector “is actually the part of the economy that has not [done] very well.”
He and his colleagues on the panel attribute that to concerns about taxation and regulation in the state.
“We think about companies like Google or Twitter as huge economic engines,” Gitlin said, “but 65 to 75 percent of job creation is done by small companies. So when those entrepreneurs … don’t have the level of confidence, they begin to be more restrained. They’re restrained in the people that they hire. They’re restrained in their willingness to take on more real estate. They’re restrained in decisions that they make about capital purchases.”
Conversely, a rise in that confidence would lead to an even more robust tech-driven economy in San Francisco and Silicon Valley. “There’s an enormous uplift that can happen,” Gitlin said.