How bad is the commercial real estate crunch in San Francisco and Silicon Valley?
So bad that that prices per square foot are roughly where they were around the first dot-com boom.
So bad that Uber decided to go in, buy its own piece of land and build its own headquarters from scratch.
So bad that Doug Shorenstein, part of the storied multi-generational family of San Francisco developers that rehabbed the building that houses Twitter’s headquarters, went on Fox to explain why landlords are the demanding 10-year leases that are making Benchmark Capital’s Bill Gurley and Marc Andreessen finally talk about the “b” word.
Space is so tight that startups are quietly trickling over into downtown Oakland, where rents for creative office spaces are roughly half to two-thirds of what they are per square foot in San Francisco. The’s city’s commercial vacancy rate is also double San Francisco’s at around 14 percent.
Nothing might be more symbolic of Oakland’s oncoming wave of change than what’s happened to the Oaksterdam University gift shop.
The university, dubbed “America’s first cannabis college,” was started by activist Richard Lee to teach growers about everything from horticulture to law. An activist for more than two decades, Lee was involved in a failed bid back in 2010 to legalize the drug beyond medical use through the California state ballot proposition. His house was raided over the summer by federal agents from the IRS and DEA with no particularly well-explained reasoning that I’ve seen.
After a previous raid in 2012, he stepped down from leading the institution and the gift shop stayed vacant for about a year.
Meanwhile, Jason Aramburu, a Princeton grad who had worked on agricultural sustainability issues in East Africa, was starting a company. With the help of designer and Jawbone chief creative officer Yves Behar, Aramburu had designed a smart, Internet-connected garden sensor that could pick up soil acidity, temperature and moisture. His company, called Edyn, first debuted on-stage at TechCrunch Disrupt last year. After operating in and out of Berkeley and San Francisco, Aramburu needed bigger office space.
It’s tough. On the large end, the last time I checked there were less than a half-dozen spaces with more than 100,000 square feet available in SF. Small space is just as competitive and pricey.
But Oakland’s a totally different story.
When Aramburu first checked out the gift shop space, which had been vacant for at least a year, he heard some recorded chanting music wafting through the air. His Chinese-American landlords were doing a kind of ritual for someone — really anyone — to take the space.
He signed the lease. It ended up costing about a tenth of what he would have ended up paying in San Francisco’s startup-heavy SOMA district.
Yeah, a tenth. And it’s three blocks from a BART station.
“It’s insane,” he said. He had more than enough space for what he needed, so he’s renting out the other part to a non-profit.
So now, the one-time cannabis educational institute is home to an Internet-of-things gardening startup.
Edyn isn’t alone in Oakland. Up Broadway Street, there are a few other Y Combinator startups like journalism crowdfunding platform Beacon Reader and The Immunity Project, which is developing an HIV and AIDS vaccine. There’s also the high-end photo app VSCO, which just raised a hefty $40 million led by Accel Partners, and the stalwart Pandora, which has been in the city for years. On the phone a few weeks ago, Sam Altman mentioned that two Y Combinator companies were moving over, but he didn’t name who because it was the startups’ news to share, not his. He said that one was pretty high-profile.
Then over the summer, Menlo Park-based real estate investment firm Lane Partners also plunked down $25 million to buy the old 400,000-square foot Sears building downtown. They’re going to renovate it, rename it “Uptown Station” and hope to lure a big tech tenant.
Um, so does Oakland want a flood of tech bros?
Is Oakland prepared for what might be coming? Does it even want this?
The city has twice the land mass, half the population and roughly one-fourth of the city budget of San Francisco.
It’s in the middle of a mayoral race at the moment where issues like community policing, jobs and education seem to be more at the forefront than housing, which is San Francisco’s red-hot button at the moment. (Today, by the way is the last day to register to vote before the elections.)
Current mayor Jean Quan has adopted a plan to build 10,000 housing units, which seems to be inspired by former mayor and current California governor Jerry Brown’s playbook. (She did not return a request for comment.)
Rebecca Kaplan, who polls say is the current front-runner, sees a lot of room for in-fill development.
She thinks Oakland could add another 100,000 people.
“That might sound like a lot,” said Kaplan, an MIT alum who started programming in BASIC and Pascal when she was 11. “But given that we have so much unbuilt space and so many abandoned buildings that need to be brought back into re-use, I don’t actually think 100,000 people would make Oakland feel overcrowded. We would still be so much less dense than San Francisco.”
Across the Bay in San Francisco, there is practically a pissing match every time over building even a 100 units here or there.
Over the summer in one of the lowest turnout elections in city history, San Francisco voters decided that they wanted to vote on every project on the waterfront that was higher than existing height limits, which are sometimes zero. That proposition was funded primarily by a single wealthy couple that lives on the waterfront.
The ostensible intent was to prevent a wall of high-end luxury condos from sprouting along the city’s waterfront. But there’s a perverse consequence of injecting so much political uncertainty into every development: project and borrowing costs have to rise to compensate for the heightened risk of something not passing through city’s highly politicized process. Those additional financing costs get reflected in the ultimate prices of housing units.
Oakland’s development process, however, is slightly more relaxed. The non-profit Housing Action Coalition has a rundown on the differences here. And if you want an explanation of why rents are so high in entire San Francisco Bay Area region, here is a 13,000 word explanation of that.
Kaplan pointed to a 300,000-square foot Class A LEED certified building that’s permitted to be built right above the 12th Street Oakland BART station. That is a choice piece of real estate, given that tech companies like Dropbox, LinkedIn and Salesforce have already pre-leased more than two-thirds of the office space currently under construction in San Francisco.
“We have some absolutely fabulous commercial real estate if someone wanted to step in,” Kaplan said.
Libby Schaaf, who has zoomed into second place in the polls after being endorsed by her former boss Governor Brown, also wants to attract tech incubators and startups to the city. She partnered with Kiva to offer loans to small, homegrown Oakland businesses, lured Code for America to
move its headquarters come to Oakland and worked with them on a program to make public records more accessible online. Correction: An earlier version of this story said that Code for America moved to Oakland; it merely partnered with the city on a number of projects and has no plans to move from San Francisco.
“I really am hopeful that tech companies that come to Oakland choose to have a social conscience,” she said. “We’ve always been a city of social movements. That is the part of the DNA of our city.”
While she was hesitant to throw out a specific housing goal like rivals Quan and Kaplan, she favored a lot of market-rate housing development along transit hubs.
“One of the best ways to stave off more displacement is to build more housing,” Schaaf said. “We can create more revenue streams to address the affordable housing need, but we shouldn’t discourage this much-needed infusion of market-rate housing.”
She favors using targeted subsidies to transform existing units into permanently affordable housing over constructing new below-market rate units. In San Francisco, developers either have to build 12 percent of units on-site as permanently affordable or pay 20 percent into a fund. It’s a particularly expensive way of providing affordable housing units, since each new unit can require at least $250,000 in subsidies. Without as much federal or state funding for affordable housing as there has been in the past, those costs usually get passed onto the buyers of other units, which makes it arguably a tax on market-rate units. This new building slated for 6th and Howard in San Francisco, for example, will cost $690,000 to build each permanently affordable unit.
Schaaf argues that taking existing units that people already live in and either using tax credits or direct subsidies to convert them into permanently affordable units might be a more effective route. She still favors upholding inclusionary goals that set aside 15 percent of new housing in redevelopment areas as affordable.
She also mediated negotiations over the spring to cap the maximum increases under rent control to 10 percent a year when a landlord does capital improvements or debt service passthroughs. Rent control covers about 60,000 of Oakland’s roughly 170,000 units, which is a slightly lower percentage than San Francisco, where 172,000 of the city’s 376,000 housing units are rent-controlled.
Oakland’s maximum rent increases are also looser than what you’ll find in San Francisco; they match the pace of inflation unless the landlord does capital improvements. San Francisco’s rent board caps rent increases at 60 percent of the CPI, which means that almost half of the city’s units’ rents are declining in real economic terms even as market-rate rents on the city’s 37,000 non-rent controlled units climb to nationwide highs.
Kaplan’s goal is to set aside 25 percent of new development as affordable housing.
“The goal is not for Oakland to copy what San Francisco has done,” Kaplan said. “Our goal is a future that is thriving, dynamic and inclusive. We won’t allow wrongful evictions, we’ll enforce the housing laws and we’ll protect tenants.”
For comparison, Mayor Ed Lee has said that he wants 10,000 units of his goal to build or rehabilitate 30,000 housing units by 2020 to be affordable.
The Regional Question
Oakland could sure use the tax revenues from tech jobs and population growth. The city has had to cut its workforce by more than one-fifth over the last decade after the 2008 financial crisis gutted its finances. San Francisco’s progressives also don’t seem to mind pushing tech across the Bay either; former mayor Art Agnos said last week in a forum that tech companies ought to look at the city to relieve pressure from San Francisco’s heated market.
This is the thing. Cities make these decisions to attract these jobs, startups and people because they want the tax base. As vocal and critical as parts of the progressive community are about Mayor Ed Lee’s policies, San Francisco’s annual budget is more than $1.5 billion larger than it was when he took office. Virtually all of that economic growth is due to the tech boom and the spillover jobs it has created.
After the financial crisis, municipal Bay Area governments made choices favoring job creation. These choices just worked far faster than people anticipated. Too well for the current infrastructure and region’s severely constricted housing stock to handle.
I was in San Francisco in the Mission District five years ago when blogs like Mission Local were cataloguing stores shutting down amid the recession. These days, it’s a different story. With some longtime businesses being priced out, city supervisors are considering building a registry of legacy businesses that’s paired with financial incentives for landlords to sustain them.
Then, of course, there’s housing. San Francisco has ended up creating 70,000 jobs since 2010, but it has only built roughly 5,000 housing units in the same time period. Even with all the construction cranes everywhere, last year is only marginally better: the city added 17,600 jobs in the last year but finished a net total of 2,940 housing units during the last four quarters.
As I’ve pointed out, it is a regional problem. But the Bay Area’s diffuse power structure makes it difficult to have a cohesive, long-term vision for the entire region. In New York City, there are 8.4 million people under a single municipal government. In the Bay Area, there are 7 million people living under 101 city governments and 10 bus and rail systems. Everyone ends up just shoving the problem onto everyone else, and the wealthiest suburbs on the peninsula and in Marin County are the worst culprits.
Back in 2012, the city council of Mountain View, where Google is headquartered, approved space in North Bayshore for an additional 10,500 weekday commuters, but no housing. That combination of limited or no housing development, plus Google’s transformation into a nearly 54,000-person company has made home prices and rents out of reach in what used to be a middle-class suburb.
“On paper, I’m a millionaire,” said Lenny Siegel, who is running for Mountain View city council and bought a home there back in 1979. “My house is probably worth between $1.5 and 2 million now, but my kids can’t afford to live here.”
Siegel is pushing to allow 5,000 new housing units in the North Bayshore area, which Google has wanted to do for years.
Kaplan also sees it as a regional problem. There is some groundwork for a regional movement, but it’s not very powerful or enforceable. A Plan Bay Area calls for adding 2 million people to the region by 2040 and there is a regional organization called the Association of Bay Area Governments that is supposed to set aside housing allotments for every city. But many city governments do not actually follow it.
Kaplan said that individual cities may need to work out deals. So, for example, if Menlo Park fails to build enough housing to go along with the 11,000-person campus Facebook is currently constructing there, perhaps they should pay into a regional fund that will build affordable housing elsewhere.
Trying To Not Do It All Wrong
While there are a lot of sexy, surface-level stories like this New York Times piece on how Oakland is the new “Brooklyn By The Bay,” there are also immense concerns around displacement.
The history and landscape of Oakland has been profoundly shaped by racialized housing policies and redlining in the mid-20th century, which separated the relative privilege of the hills in the East from the entrenched poverty in the flatlands of the West. Basically, minority parts of the region had little or no access to Federal Housing Administration-backed mortgages, which prevented the capital accumulation that other communities were able to experience through homeownership. Because banks deemed certain areas risky, that also meant that many kinds of basic businesses like grocery stores couldn’t find the capital to open up in these neighborhoods. If you want a primer on this, I would just go read Ta-Nehisi Coates’ long and comprehensive piece in the Atlantic.
In the face of so much exclusion and disinvestment, black communities in the East Bay had to build their own institutions and culture. Oakland has been home to everything from the Black Panther Party to strands of West Coast hip-hop, rap and R&B.
The community’s size peaked in the 1980s, and between 1990 and 2011, the city lost about 40 percent of its black population. Some of this is by choice as black homeowners sell property and move elsewhere into the suburbs, exurbs or follow a broad migration back into the South. Some of it is not, with lower-income blacks being priced out and displaced into areas where the unemployment rate is higher. Broadly speaking, as both baby boomers and the young and affluent move back into the U.S.’s inner cities, poverty is being suburbanized in less dense areas that don’t have the resources or institutions to deal with economic deprivation.
Gentrification is a complex phenomenon that brings both risks and opportunities. In a study published in the American Sociological Review over the summer, Harvard University’s Jackelyn Hwang and Robert Sampson, found that gentrification basically bypasses areas that are more than 40 percent black. That segregation means that these communities get left out of the informal social networks that lead to jobs and upward economic mobility, and generally get relegated to underfunded schools and poorer quality public services. The impacts of being in these different neighborhoods are enduring and multi-generational, Sampson found in his landmark book about Chicago.
But what’s happening now in American cities like New York and San Francisco where gentrification is at its most advanced, this growth is putting pressure on historically black neighborhoods. That’s what you’re seeing when San Francisco’s Bayview-Hunters Point neighborhood has its most expensive single family home sale ever. Or when a plan to rezone West Oakland — colloquially known as ‘WOSP’ — is passed despite protests. Or in East Palo Alto’s brutal fight against Sam Zell’s Equity Residential. Or when director Spike Lee goes on a tirade about gentrification, as it starts to spill over into Bedford-Stuyvesant after Bushwick and Williamsburg. Or when the young mayor of Compton tells the Guardian that her city is the new Brooklyn.
Shortly after the first tech boom, Oakland novelist Ishmael Reed railed against Jerry Brown for affecting “a countercultural style while practicing a brutal capitalist philosophy,” when the former mayor carried out plans to bring 10,000 new residents to downtown Oakland.
For Oakland, it raises the question: is it a people or is it a place?
For the tech community, which has faced criticism about its lack of diversity, there is an opportunity — if people want to rise to it — to create something integrated. Several of the city’s startups are already run by black founders like Mindblown Labs‘ Jason Young.
Two pieces worth reading are Susan Mernit’s essay “San Fran Tech Types: What You Need To Know To Move To Oakland” or writer and playwright Chinaka Hodge’s “Gentrifier’s Guide to Getting Along” from San Francisco Magazine.
Mernit, a former Yahoo, Netscape and AOL executive, is the co-founder of Hack the Hood, a non-profit that teaches tech skills to minority youth in Oakland. It recently won grant money from Google and part of a $500,000 donation that Marc Andreessen and his wife Laura Arrillaga-Andreessen gave to three non-profits.
“Oakland has a terrific start-up community, but it’s very connected to place, and to culture,” she said. “The way to do well here is to learn from your neighbors. Get involved in what’s here already–and hire some local people as you grow.”
Ayori Selassie, who grew up in West Oakland and has worked as an engineer and product manager at Salesforce for the last seven years, said that hands-on time and mentorship might be more helpful than money or the creation of service-level jobs.
Many of the tech industry’s fastest-growing companies like Uber or Homejoy, actively create a two-tier system of jobs that may align with or even reinforce pre-existing socioeconomic and racial inequities. Neither company has released diversity numbers on their employee and contractor base; no one really understands whether these business models will enhance or diminish social mobility over the long run. Other big companies like Facebook and Google have also received blowback for how they pay and employ security guards, shuttle drivers and delivery people for projects like Google Shopping Express.
“There are jobs where that don’t require college-level skills like facilities and administration work. Many would like to see those jobs go to people in the community,” Selassie said. “But what concerns me about that is it reinforces a social hierarchy that says unskilled labor should be relegated to people of color and so it doesn’t solve the challenges of social inequity. It might put a temporary dent in gentrification, but it will be short lived.”
The real work of building and training a diverse work force takes years of engagement and effort. (You know, maybe less of this kind of “Making The World A Better Place,” and more of this kind instead.)
“For sustained change we need our startups to be vested in the social journey of people in the community,” she said. “They need to volunteer in the schools, mentor, and give their time — not just money — to the community to be a part of lasting change. I understand that startups can be capital-limited, and that’s OK because their story, life experiences and empathy are the most valuable thing they can give to these communities. Once that happens, real progress can begin.”