Sept. 18 (Bloomberg) -- An office shortage in San Francisco’s traditional technology district is aiding the revival of a blighted neighborhood known as Central Market, as young companies migrate to a new hub with fast-growing rents.
Asking rates on Market Street between Fifth Street and Van Ness Avenue -- northwest of the popular technology area called South of Market -- jumped 18 percent in the second quarter from a year earlier to an average of $46.48 a square foot, data from brokerage CBRE Group Inc. show. Internet firms have driven gains, with mobile-payment service Square Inc. moving this month to a converted bank data center.
The once-bleak stretch of empty buildings has had $2.4 billion in development and property sales since 2011, including projects by Hudson Pacific Properties Inc., AvalonBay Communities Inc. and Shorenstein Properties LLC, according to CBRE. San Francisco’s surging job growth and scant new office supply sparked the renewal, along with a 4.4 percent vacancy rate in South of Market that constrained growth there.
“We knew there was going to be overflow, but nobody thought it would be like this,” said Victor Coleman, chairman and chief executive officer of Los Angeles-based Hudson Pacific, the landlord at 1455 Market St., the 1 million-square-foot (93,000-square-meter) data center that lured Square as an anchor tenant. “This situation is pretty unique.”
‘GRAND BOULEVARD’
The vision of Market Street as a “grand boulevard” dates to San Francisco’s earliest days under U.S. control in 1847, said Anthea Hartig, executive director of the California Historical Society. An “urban cacophony” reigned on the city’s preeminent thoroughfare for almost a century with four sets of streetcar rails and ornate theaters and restaurants lining both sides. Television, automobiles and suburban flight took their toll by the 1950s, leading to a long decline.
Now, quoted rents of $55 a square foot at that building and $57 a square foot at Shorenstein’s Market Square, a former furniture mart where Twitter Inc. moved last June, have soared to levels similar to those in South of Market, CBRE data show. In both properties, floors spanning a city block allowed for creative conversions with abundant common areas and value-added amenities.
Shorenstein’s renovation plan for the mart, a 1930s Art Deco landmark, followed quickly by Twitter’s lease, boosted investor confidence in Central Market and set the stage for the resurgence that also includes 4,500 new housing units and retail development close to Union Square, the city’s marquee shopping area, according to San Francisco Mayor Edwin Lee.
SQUARE’S GROWTH
Twitter, the microblogging service that said last week it filed to go public, is paying $30 a square foot for 210,000 square feet and a $55 rate for an additional 85,000 square feet, said a person with knowledge of the lease who asked not to be identified because the terms are private. The company also has exclusive use of a roof deck, the person said.
At 1455 Market, Square is paying $39 a square foot on average for 330,000 square feet, while online car-hire service Uber Technologies Inc. is renting 88,000 square feet at a $48 rate and is set to move early next year, the person said.
Jim Prosser, a Twitter spokesman, Square’s Lindsay Wiese and Uber’s Andrew Noyes declined to comment on the leases.
Square was committed to staying in the city after it outgrew its space in the San Francisco Chronicle building just south of Central Market, the company said in an October statement announcing the move. The new offices are more than four times larger and offer “an open, collaborative space, a roof deck, chef’s kitchen and other amenities,” Square said.
CHRONICLE BUILDING
“We’re grateful for San Francisco’s commitment to technology, and we’re thrilled the city will remain our home,” Square’s founder, Jack Dorsey, also chairman of Twitter, said in the statement.
The payments company developed its prototype device at Hearst Corp.’s historic newspaper offices, at Fifth and Mission streets. Yahoo! Inc. is keeping its financial district office and expanding to the space vacated by Square, which grew to more than 600 employees from half that a year ago.
Central Market’s office vacancy rate was 14 percent in the second quarter, down from 25 percent in the first quarter of 2011, before the Twitter lease and Market Square renovation, according to CBRE. About 515,000 square feet of the district’s 3.7 million total was available for rent as of June 30.
South of Market, home to Google Inc. and Salesforce.com Inc., had the city’s lowest vacancy rate in the second quarter and average rents of $55.65 a square foot, up 12 percent from a year earlier. The district has 6.3 million square feet of offices.
TAX BREAK
Apartment projects under way in Central Market include developer Crescent Heights’s NEMA luxury towers on 10th Street and AvalonBay’s Ninth Street high-rise. About 500,000 square feet of new retail and offices by Hudson Pacific, and joint venture partners Cypress Equities LLC and Carlyle Group LP, are rising near Fifth Street. Additional retail projects are coming, Lee said in a City Hall interview.
San Francisco’s April 2011 enactment of a payroll-tax break for companies that relocated to certain Central Market properties included Twitter’s building and spurred other technology tenants to follow, said Oz Erickson of Emerald Fund, a locally based housing developer. The benefit encouraged development of nearby properties as investors anticipated spillover demand, he said.
“The Twitter tax break provided exactly the right stimulus to keep valuable, high-paying jobs in San Francisco,” said Erickson, who is converting an office tower on Van Ness Avenue two blocks north of the tax-break zone into 400 apartments. “If they hadn’t kept Twitter, they wouldn’t have kept Square, and we wouldn’t be enjoying this employment boom.”
TECHNOLOGY JOBS
Across the U.S., the technology industry is growing at four times the pace of the broader economy, Jones Lang LaSalle Inc. said in an Aug. 15 report. San Francisco ranks as the nation’s top technology office market, based on factors such as job growth and venture-capital funding, the brokerage said.
Employment rose 27 percent in technology manufacturing and services, and the city’s $736 million in venture-capital funding beat Silicon Valley’s total and doubled New York’s, according to data compiled by the brokerage.
Just two years ago, Central Market had more vacant storefronts and single-room residence hotels than any neighborhood, with 31 percent of households earning less than $15,000, triple the city average, a multiagency survey found.
Reconciling that poverty with “all this money coming into the neighborhood” remains a challenge to a continued revival, said Ellyn Parker, project manager at Central Market Partnership, which oversaw the survey. Homeless people began living in alleys and plazas to be near clinics for mental-health and substance-abuse services, she said.
‘ABJECT FILTH’
“It’s a fragile population that doesn’t have anywhere else to hang out,” Parker said.
Some new tenants have seen crime, poor sanitation and “abject filth” up close, said Peter Fenton, a partner at Benchmark, a Menlo Park, California-based venture firm that opened an office at Sixth and Market to be close to startups. The tenants aren’t interested in a “whitewash” of urban grit, just basic public safety, he said.
“There was a gunshot victim half a block from our office a week ago,” Fenton said in a telephone interview. “We get a report on the block where we are that shows routine stabbings. The city has to make a decision as to whether or not they want to get serious about violent crime and public urination.”
1912 FACADE
Up the street at Twitter’s headquarters, plans for a new restaurant, artisan market, shops, public courtyard and a second office phase will bring total investment in the project to $300 million, Doug Shorenstein, chairman of the San Francisco-based developer, said in an interview.
The ground floor of Hudson Pacific’s 901 Market St., a 250,000-square-foot office and retail project, is being renovated within a 1912 facade for anchor tenant Nordstrom Rack. The building’s most recent tenant, HotelTonight.com, has offices on the fourth floor that wrap around the corner of Market and Fifth streets and overlook the 125-year-old Powell Street cable-car line. Sofas outnumber work benches, and a well-stocked bar sits next to a ping-pong table.
The online booking service signed a lease in October at $51 a square foot, the person with knowledge of the Twitter and Square leases said.
Seven blocks up Market Street, the former Bank of America Corp. data center, purchased by Hudson Pacific for $95 million, is undergoing improvements such as $7 million in new windows that will change the look and feel of interiors including Square’s space, Coleman said. The company moves in on Sept. 30.
“The reality was that the city didn’t have a lot of square footage available, so growth had to go in this direction,” he said. “People told me I bought the ugliest building in San Francisco, but that’s great because the only way to go is up.”
--With assistance from Brian Womack and Ari Levy in San Francisco. Editors: Christine Maurus, Daniel Taub
To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net
To contact the editor responsible for this story: Kara Wetzel at kwetzel@bloomberg.net
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