Tuesday, February 20, 2007

San Fran at center of new tech boom

Competitive leases, skilled workers lure Internet, software companies to downtown office buildings

Office obsession
Tech companies are gobbling up office space in San Francisco.
Here are some of the biggest leases, in square feet, since the start of 2006:

Advent Software: 104,000
Pay By Touch: 92,900
Microsoft: 71,600
Riverbed Technology: 63,800
Yahoo: 42,800
StubHub: 37,500
Ingenico: 37,500
Source: Chronicle research

For technology companies, San Francisco is -- once again -- the place to be. Proximity to top workers, competitive lease prices and an eclectic lifestyle has made the city's downtown an irresistible draw for many Internet and software companies.

Industry superstars Yahoo Inc. and Microsoft Corp. have lead the boom by gobbling up large swaths of office space the past year. Google Inc. is on the verge of planting its flag in the city, having signed a letter of intent for space near the Embarcadero, according to sources familiar with the negotiations.

The influx of tech companies into San Francisco is part of a broader Bay Area real estate boom. New companies, along with many of the established names, are on hiring binges and sorely in need of office space.

In San Francisco, a quarter of all office space leased in 2006 went to technology companies, up from 14 percent in 2004, according to the commercial realty company Grubb & Ellis.

For commercial real estate agents, the strong demand is welcome. Just a few years ago, during the tech industry's downturn, many once-high-flying Web sites such as Pets.com and Quokka Sports shuttered, leaving the market flooded with vacancies and the city's economy in tatters.

"Space is far less available than it once was," said David Kuchinsky, a vice president at Grubb & Ellis. "In 2004, tech companies could get a lot of smaller space relatively inexpensively. That really changed in 2005 and into 2006."

Empty offices are more difficult to find these days. The vacancy rate for Class A space is 8.5 percent, half of what it was three years ago, according to Cornish & Carey, a commercial realty group.

The tighter market is driving rents up. The average asking price for Class A office is $36.80 per square foot, an increase of 30 percent from the market's trough three years ago.
Still, San Francisco remains competitive. For now, prices remain on par with Silicon Valley and the East Bay, where the cost of office space is also appreciating.

Interest in San Francisco speaks in part to the technology industry's transformation over the years from producing computers and microchips, usually in Silicon Valley. Now, many of the hottest companies are in online media and business software, niches that can draw on the city's traditional strength in design, advertising and programming.

Last year, Web portal Yahoo expanded its San Francisco outpost by leasing an additional 43,000 square in the Financial District for sales staff and its online photo-sharing service, Flickr. A second office being renovated in SoMa will house a research-and-development team.

In another major deal, Microsoft recently signed a lease for 72,000 square feet in the Westfield San Francisco Centre, the expanded shopping and office complex downtown. The space will house sales staff and paves the way for the company to double its workforce there to 400 over the next five years.

Among the most highly anticipated arrivals is Google, which has signed a letter of intent to sublease 210,000 square feet from Gap Inc., enough space for up to 800 workers. However, the deal, which Google declined to confirm, has yet to be finalized and could fall through, according to two sources familiar with the negotiations.

Google's office would take up three currently vacant floors in a building on Spear Street, near the waterfront. The company's headquarters, known as the Googleplex, would remain in Mountain View.

Mayor Gavin Newsom said San Francisco has aggressively courted Silicon Valley companies, calling the jobs they bring a potential boon to the city's coffers. Each new worker, he said, translates into $1,700 in additional tax revenue, along with helping local businesses such as dry cleaners, cafes and markets.

"These are the jobs of tomorrow," Newsom said. "They bring a vibrancy to the city and an excitement, and that's great for us."

Proximity to top-notch workers is a big selling point for San Francisco in getting tech companies to open up shop. Commuting to and from Silicon Valley can eat up as much as three hours a day, prompting many residents to balk at accepting a job down the Peninsula.

Companies such as Google try to compensate for the inconvenience by offering free commuter bus rides to Silicon Valley. Opening offices in San Francisco is considered a more attractive alternative for employees and potential job candidates.

"Companies were reticent at first to come to San Francisco because of the perceived high cost of doing business," said Nick Slonek, a senior vice president at Cornish & Carey. "The fact of the matter is that they've been able to bite the bullet and retain and attract talent who otherwise wouldn't come down to the valley or in the East Bay."

A big part of the real estate demand is fueled by technology companies already based in San Francisco that have outgrown their offices, such as Advent Software, whose clients are investment firms, and Ingenio, a company that helps online advertisers connect with consumers over the telephone. To accommodate new hires, they've had to upgrade to larger spaces.