Leasing commercial space in San Francisco is as expensive as ever, but prices are mostly holding steady for the first time in a long time — not rising. That shift has landlords offering more perks and brokers wondering what’s next.
Their obvious concern: that good times can’t last forever, especially for venture-backed companies that aren’t IPO candidates and whose chances of getting acquired may be diminishing by the quarter.
Certainly, the cash isn’t flowing quite so freely at the moment. According to Pitchbook, investment in U.S.-based startups is right now down 40 percent year from the amount invested at this point last year.
Meanwhile, Medium, DoubleDutch, AdRoll and Github are among a growing number of San Francisco-based companies that have downsized recently as they either rethink their strategies or refocus on core strengths while simultaneously reducing their overhead.
“With some of the things that are being talked about on a federal policy level — reducing the corporate tax rate, repatriating cash at a lower tax rate — it looks like the [positive] economic cycle will continue for the tech industry,” says Colin Yasukochi, director of research and analysis at the commercial brokerage firm CBRE. “How long it will last is anyone’s guess, though,” he adds.
“This expansion is definitely long in the tooth, for the U.S. and the Bay Area in particular,” says Robert Sammons, a director of research at the commercial real estate company Cushman & Wakefield. “But I think we’re forecasting a slowdown, not a recession, and I think it’s just because it’s the cycle. It’s time. We need to reset the clock a bit.”
Asked about who exactly is renting what, Yasukochi calls commercial tenants a bit of a “mixed bag” currently. “You have the larger, stronger tech companies that are well-capitalized and in some cases public and which are growing and expanding and still doing well. Then you have a lot of others that are smaller or where things are not going as well, even public companies like Twitter.”
In short, like the broader tech industry itself, there are increasingly haves and have-nots in the world of tech tenants, with those that are benefiting and growing from so-called network effects, and those that are not.
“You do still see startups coming through,” says Sammons, “but not at the same pace as two or three years ago. We more see mature companies — the Ubers, Facebooks, and Googles — poking around. I think [further consolidation by these companies] is what we’re moving toward.”
So far, the trend hasn’t resulted in softer pricing, even if it has stopped costs from continuing to shoot skyward. (Trophy offices, which rose to $100 per square foot in 2014, continue to cost as much, according to CBRE; that’s second only to the most expensive office space in New York.) Sammons and Yasukochi suggest that could change, however.
For one thing, there are those startups that may well be running on fumes at this point. They represent a smaller percentage of the overall market, but the question lingers: “Is there a funding cycle for these companies later this year? That’s when the rubber might meet the road. You’ve got to be making money at some point,” says Yasukochi.
There’ve been a few big M&A deals, too, including Cisco’s recent acquisition of San Francisco-based AppDynamics for $3.7 billion on the eve of its expected IPO, and Pfizer’s $14 billion acquisition last August of Medivation, a San Francisco-based biopharmaceutical company that was trading publicly. Why does it matter? Because redundancies usually result in a need for less space.
Yasukochi says that tech firms that have reduced head count can usually quickly sublease the space because it’s “built out and ready to go.” And there are always new companies receiving investor checks, even if they’re fewer and further between right now. Presumably, those startups will continue moving into San Francisco as others scale back or shut down.
Either way, to be on the safe side, landlords have stopped increasing the amount they charge tenants. They’ve also begun offering “more flexibility to quality tenants who they think will pay them,” says Yasukochi. Among those incentives: more free rent at the beginning of a lease and paying more from their own pockets to improve the space.
“Before, landlords were dictating all the terms, Yasukochi says.
“That’s not necessarily the case anymore.”