San Francisco Office Space Becomes Most Expensive In America

San Francisco has become the most expensive place to rent an office as tech startup cash flows to commercial landlords.  While San Francisco commercial rents rose 14 percent in 2015, Manhattan saw rents increase at only half that rate, with a 7 percent climb for the once most expensive city in America.

San Francisco has become the most expensive place to rent an office as tech startup cash flows to commercial landlords.  While San Francisco commercial rents rose 14 percent in 2015, Manhattan saw rents increase at only half that rate, with a 7 percent climb for the once most expensive city in America.

That honor has gone west as Silicon Valley’s sprawl into the urban core of San Francisco has driven rents higher. According to a report by CBRE Group, a real estate investment firm, commercial properties rent for $72.26 per square foot in San Francisco versus $71.85 per square foot in Manhattan. The price differential grew in 2015 and expects to grow further this year.

Startup Cash to Blame

Some real estate veterans in Northern California remember a similar trend in the late 1990s, when the dot-com boom made commercial space a premium in tech-focused parts of the state. While the popped bubble between 2000 and 2001 hurt commercial property valuations, the property bubble of 2002 to 2007 allowed for a swift recovery.

Some real estate analysts fear a similar burst may wait on the horizon as more tech startups face “down rounds,” or a series of new funding in which the company’s value is lower than the previous one. In these cases, startups often face pressure to cut back on staff and other expenses–including property leases.  Venture capitalists lose money too, as their early investments prove to be less valuable than previously hoped, and some analysts believe this could yield a vicious cycle in which investors pull back from other investments, including stocks and publicly traded assets.

Additionally, San Francisco’s real estate market has become increasingly dependent on tech, as startups rent offices, employees rent apartments, and developers try to increase leasable square footage in an attempt to profit from the growth in area tech entrepreneurship.

Regulatory Hurdles

Several city and county codes challenged that last group, as well as vocal opposition from city residents, about new buildings under construction to meet demand. Thus, while startups shift inward to San Francisco as a base, they find a limited and slow-growing number of properties for corporate occupation.

Some analysts believe these trends will make real estate continuously pricier in San Francisco even if some startups lose valuation and spending power in the short term. Others believe the decreased demand will put pressure on residents who find the area relatively economically depressed. Either scenario looks unsettling for many residents of the Bay Area.

There is little indication that startups will turn away from the region. In an ironic twist for an industry that promised to make communication global, instant, and cheap, San Francisco startups show no inclination of leaving the region or encouraging telecommuting work. In the last three years, several large tech firms—notably Yahoo and Reddit—banned or severely restricted telecommuting. The effects of the move remain unclear, except they have brought more IT workers to the Bay Area–and helped rents rise.