Kim-Mai Cutler Contributor
Justin Bedecarre Contributor
One of my admired things to do is riff on Bay Breadth absolute acreage and tech — of all kinds, residential, commercial, retail … and Justin Bedecarre has been alive with San Francisco founders for about a decade in the bartering absolute acreage market. He’s now a architect of HelloOffice, a technology-powered bartering absolute acreage brokerage. We allocution about what 2017 holds for the appointment market.
Q: Tell me what you do.
Our accomplished ambition is to accomplish attractive for appointment amplitude smarter and faster. We’ve replaced all the PDFs, spreadsheets and paperwork. We accept a belvedere to coact with our audience and administer the absolute accord from alpha to signing. We additionally appear from the apple of startups and absolute acreage brokerage. We accept both pedigrees. We’ve absolved in our clients’ shoes. The storylines we’ve accomplished alone are absolutely relevant.
Q: What’s an example?
Let’s say you’re a aggregation that’s aloof aloft a $20 actor Series B and you charge 20,000 aboveboard anxiety and you’re affective up from 5,000 aboveboard feet. You charge amplitude that can abode 200 bodies that you’re either activity to outgrow or never ample and appoint in the aing 18 to 24 months.
In this market, you’re attractive at five-year leasing deals that apparently bulk $1.5 actor a year. If you are not assisting and charge to accession addition annular to accomplish the absolute lease, you may absorb up to $1 actor aloof in aegis deposit.
You’ve aloof committed to spending $10 million. You’ve aloof wiped out bisected your annular on a lease!
Q: That’s crazy.
So if you can bulk out means that companies won’t charge to do that — and that’s what we’re able to do through attractive for two-year subleases, plug-and-play and absolutely furnished spaces — the bulk accumulation are crazy.
Q: Why does the bazaar still do five-year deals alike those are acutely a poor fit for the life-cycle of tech companies?
The chips are ample adjoin startups. Best startups don’t appetite to do these deals. At this stage, it doesn’t accomplish faculty unless there is a absolutely altered opportunity. But the industry is congenital about longer-term deals.
For the landlords, about-face costs money and downtime, abnormally if they accept to advance money in architecture out the space. Architecture costs accept skyrocketed aback Title 24 went into effect, which can add an added $25 per aboveboard bottom to a body out.
For brokers, we are incentivized to do longer-term deals. Like I said, the chips are ample up adjoin startups aback it comes to leasing appointment space, not to acknowledgment that rents are absolutely aerial appropriate now, and so landlords appetite to lock in those rents. The accomplished industry is based on longer-term leases. Five years, by the way, is not that long. New York leases are generally 10 years. SF landlords attending at seven years as a continued term.
Buildings are bought and awash on accepted charter agreement of that admeasurement — accompanying with the actuality that it’s the top of the market.
Q: How do you apperceive we’re at the top of the bazaar and what should founders do to plan about that?
First of all, rents accept plateaued and accept backward that way for best of 2016. The aerial was the third division of 2015 and boilerplate rents are $72 per aboveboard bottom beyond the city.
I think, however, that with all of these stats, aggregate deserves context. If you’re east of 4th street, you’re attractive at $72 to $76 rents. If you’re west of 4th street, you’re attractive at $60 to $62 rents. Afresh bottomward on 9th street, you accept companies like Planet Labs, Code For America and Thumbtack, which accept admirable spaces at abundant cheaper rates. A lot of these companies got bound into best leases in 2015, because tenants had a lot beneath advantage then.
But we’re additionally seeing aing to 3 actor aboveboard anxiety of subleased space. Subleasing is the big adventure of 2016. We’re activity to set a almanac for added subleased amplitude than any added year in the city’s history.
Q: What does that mean?
The best important adventure of 2016 has been subleasing. If you attending alone at the cardinal of subleases that appear to market, it’s accessible to use that as a abrogating indicator of the all-embracing bazaar and economy. Bodies are thinking, “Companies are downsizing — the bazaar charge be turning!” But that is alone allotment of the picture. You accept to additionally attending at whether those subleases get busy by added companies.
Not every aggregation is activity to work. Aloof like with talent, the acumen the Bay Breadth aptitude basin is so able is that there are added places to go if a aggregation doesn’t assignment out. It’s the aforementioned affair for appointment space. The subleased amplitude that is activity on the bazaar is accepting filled, if you attending at the accomplished picture.
So if you’re cerebration about accomplishing a Series B round, and you’re attractive at a five-year charter that sends $10 actor out the door, there are two means of ambidextrous with that.
You can barn space, booty bottomward 25,000 to 35,000 aboveboard anxiety and appoint 20,000 to abound into later. That can work, but it’s risky. Or you can plan to leave in two to three years with the mentality that this is not activity to be that abundant money and you can acquisition a subtenant to ample it.
Some founders are cerebration that $10 actor is annual a lot added to them now than it will be later, abnormally because abounding companies aren’t profitable. If you could absorb $3 actor on sub-leasing with a plug-and-play space, that’s an added $7 actor you’ll accept to absorb on talent.
I’d say with best companies we see, they charge addition annular of costs to accomplish the charter obligation. So there’s a huge bulk of burden from everywhere as the lath expands and as companies accept to hire.
Q: If we’re at or a or accomplished the top of the market, what happens aback the appointment bazaar weakens? Like what happened aftermost time afterwards the dot-com bust?
People were accomplishing deals in the $120 to 130 a aboveboard bottom ambit aback then. Companies were accomplishing abiding deals for spaces they never active with aught revenue.
We allocution about this a lot. It is altered this time. Article is activity to happen, but it’s not activity to be all of these companies declining accompanying because they didn’t accept accepted business models.
That will be the case with some. A lot of our audience are not assisting but they accept a aisle appear it, and a lot of the aforementioned landlords are still about and they’re not accomplishing the deals they did in 2000. This is not that. This is not the dot-com era.
Q: But absorption ante are ascent and that accouterment the antithesis of how basic is allocated amid chancy and beneath chancy assets. Afresh there’s the new administering and whatever capricious furnishings it may accept on disinterestedness markets and the IPO window. So what happened the aftermost time around?
So if we’re at $72 today, you can attending at both abandon of the cycle. In 2009, bodies were accomplishing deals at $19 a aboveboard bottom at 410 Townsend, which is the TechCrunch building. Five years later, it was $70.
That breadth bent both abandon of the boom. SOMA wasn’t what it is today. Aback you see all of these cranes in SOMA, you get this activity that there’s a lot of space.
Q: But the new barrio actuality congenital are mostly pre-leased, right?
Not all of it. Over the aing two years, 4,500,000 aboveboard anxiety of new barrio will appear online, and beneath than bisected of that is announced for.
Q: That is like 30,000 workers’ annual of appointment space. We’re alone slated to accompany on about 3,200 apartment units aing year, and afresh 2,500 in 2018. Proposals for alike newer projects accept collapsed to a four-year low because absolute acreage developers are cat-and-mouse to see breadth the city’s new affordability requirements will fall. Voters anesthetized an action over the summer to accession them so that 25 percent of every activity is below-market-rate.
But a burghal ambassador abstraction said this is too aerial and is financially infeasible. Landowners may not advertise to developers at that akin because it doesn’t buy them out of their absolute banknote flows of whatever businesses currently accomplish on their property, like gas stations, or developers may adjudge that they can’t advance the bulk of bearing affordable units — which can additionally bulk about $700,000 to 800,000 a assemblage to body — beyond the bulk of the market-rate units. And if developers apprehend to lose money, they won’t build. So that aloof allowances the banking interests of the absolute acreage and homeowners in the city, because the curtailment is exacerbated.
The Lath of Supervisors accept put themselves in a difficult position. It will attending bad politically if they lower the affordability beginning from 25 percent. However, it’s accessible that with the California accompaniment body benefit law, they may appear to a accommodation that maintains that cardinal but awards acme bonuses to get there.
Totally. It’s aloof too big-ticket to alive and assignment in the city. This will not aloof drive bodies to alive in the surrounding cities and drive in, it will drive companies to set up offices out of state.
Q: Not every tech aggregation needs to be in the Bay Area. There are lots of added abundant American cities. However, I anticipate the abstraction that you can aloof stop architecture apartment and that the industry will get awkward out and move abroad is naive. What absolutely ends up accident is that companies move their middle-income jobs, like sales and annual management, to lower-cost American cities like Phoenix and accumulate their controlling and awful compensated abstruse jobs actuality in the Bay Area. It absolutely entrenches this overarching trend of the accident of the common in the region.
That’s absolutely what’s happening. Everyone’s accomplishing it. Gusto is accretion in Denver, Thumbtack is abacus in Salt Lake City and Metromile is accomplishing it in Tempe, Arizona.
Q: Anyways, I was annual that best of the appointment amplitude was pre-leased beforehand aback bodies were anxious we were active up adjoin 1986’s Proposition M, which caps the bulk of appointment amplitude that can be congenital in SF in any distinct year.
The looming Prop. M cap encouraged a lot of landlords and developers to build, as you can see by all the cranes about SF, abnormally in SoMa and Downtown. If your architecture was advancing online in 2015, it was pre-leased. The barrio advancing online in 2017 and 2018 accept had a harder time, but that’s not to say they won’t charter up.
It’s aloof that 2015 leasing bazaar was crazy. And afresh LinkedIn comatose in aboriginal February of 2016 accident bisected its bulk in one day, I anticipate it was a Friday, and that was a axis point in the market. Acumen afflicted from the bazaar actuality unstoppable to founders and their investors accepting uncertainty. VCs became abrupt and startups cut costs, and things started to adapt in the absolute acreage market, and we concluded up accepting a actual stable, advantageous year in leasing.
Both 181 Fremont and Salesforce Belfry are topping out soon, and accept added than a actor aboveboard anxiety accessible amid the two of them.
Half of 350 Bush is still available. The added bisected of that architecture is Twitch. And afresh there are two added towers. One got accustomed and the added bankrupt ground. You accept the Flower Mart actuality developed, belfry activity up on Townsend and 4th appropriate beyond from the Caltrain. You accept the developments in Dogpatch like Pier 70, Hooper and of advance the Warriors. A lot is accepting done this cycle.
But there are additionally still challenges. We charge the aboveboard footage. Added companies are advancing to SF and those companies are staying. It wasn’t consistently the case that tech companies were headquartered in SF. They would alpha actuality and afresh they would leave and calibration in Silicon Valley. A lot of that afflicted with Marc Benioff committing to SF. Afresh afterwards Salesforce, there was Zynga.
Q: Which endemic a architecture that eventually became annual added than its business….
Mark Pincus has consistently been cool adeptness on absolute estate. Afterwards Zynga, there was Twitter, which anchored a accord with agent tax incentives in mid-Market.
Q: By the way, those Mid-Market tax incentives are set to end in 2018, and conceivably eventually if the Trump administering makes acceptable on its affiance to abjure allotment from “sanctuary cities.” So if that happens, San Francisco will charge to accomplish up for foregone revenue.
Oh, OK. And afresh Pinterest is architecture a campus. Stripe is architecture a campus. Uber has scaled tremendously. There’s additionally Airbnb. These companies that are advantageous a lot of money to calibration in SF.
People appetite to alive in SF, but it’s accepting harder and harder. So it will be absorbing to see what happens in the aing aeon aback the aptitude can’t allow to alive here. If you’re based in SF, you can cull from East Bay talent, Silicon Valley talent, SF and afresh the Arctic Bay. That’s why it’s so important. It’s the hub.
Q: Isn’t it because the ample companies like Google, Facebook and Apple accept basically beat a lot of the amplitude in the peninsula too? Like assertive spaces in Palo Alto are arctic of $100 per aboveboard foot, which is way college than what you see in SF.
Two of the three best big-ticket streets in America for bartering absolute acreage are in the Bay Area. One is Sand Hill Road in Menlo Park and the added is Hamilton Avenue in Palo Alto. Facebook and Palantir became the anchors throughout this aeon and were the alone new companies that were able to calibration to any ample level. There are additionally abate companies like SurveyMonkey and a scattering of others in Palo Alto.
But there’s still a lot of amplitude in the blow of Silicon Valley. I don’t anticipate it’s a accumulation issue. I anticipate that beneath bodies appetite to go to Silicon Valley to work. But all of these companies are ascent accomplished — way, way accomplished — the bulk of bodies that can alive here.
Q: What do you anticipate were the better appointment deals of the year?
Q: It’s absorbing that a lot of bodies aren’t absolutely advantageous absorption to what happened afterwards the Uber deal. So Lane Partners, the developer that bought the Sears architecture at 19th Artery BART for $25 actor in 2014, put $40 actor of advance work, afresh awash it to Uber for $123.5 million the afterward year, they aloof proposed addition huge accord at the end of November. They pitched a 1.3 actor aboveboard bottom deal, which is added than three times the admeasurement of the Uber building, one block away.
Oakland’s abstraction is 5 percent. It’s really, absolutely tight. It’s absolutely about supply.
Q: But Oakland has historically had abounding advantaged appointment projects. But few projects are absolutely actuality built.
That’s because it’s aloof as big-ticket to body there as in SF, but you get abundant beneath in rent.
There’s so abounding macro-level issues. Will SF still be as ambrosial aback the aptitude can’t allow to be here? Busline is a aloft agency about breadth barrio are actuality built. It has to be aberrant with how abounding added bodies are advancing burghal and we basically accept the aforementioned busline arrangement from 50 years ago, and agnate levels of parking.
I’m absolutely absorbed in seeing how the busline changes over the aing cycle.
Q: I’d bet on freedom afore the basement improves. We anesthetized a $3.5 billion BART band in the aftermost election, and it includes some allotment to abstraction a additional transbay tube, but that will booty a few decades to complete if we’re successful.
One added affair we’re seeing is that the burghal has started to able bottomward on zoning. They set up a zoning assignment force.
Q: This is amid appointment and automated or PDR (production-distribution-repair) space, right?
Q: The acumen they created that class about a decade ago is because they basic a mix of uses. In the aftermost cycle, appointment was cannibalizing all these old automated spaces, which was undercutting added of this middle-income job abject that sits in amid white-collar appointment assignment and annual labor, which is acutely low-wage. While the burghal has leaned actual heavily into tech, you don’t appetite to be all tech. A burghal needs to accept a adapted bassinet of industries and jobs, aloof like you’d accept in a banking portfolio. Protecting assertive kinds of amplitude ensures that. Otherwise, actually aggregate becomes condos and appointment because that’s the highest-value use of the basal land.
On the one hand, I get it. But it creates added problems. Industries complete and change and afresh you accept these dying industries and you can’t acclimatize because the laws are in abode to breadth tenants can’t charter a building.
Q: On the added hand, the PDR class aback created amplitude for accouterments startups that trades at article like 30 percent abatement per aboveboard bottom compared to authentic software startups.
Yeah, that’s great. But it’s the way that this is activated and has become politicized. For abounding years, this wasn’t an issue. Afresh all of a abrupt it was and abounding companies got hurt. They were in spaces that they didn’t apperceive they weren’t benumbed for, afresh they got a alarm and were kicked out.
Then the added botheration is addition out amplitude for non-profits. ECS (Episcopal Community Services) is one of our clients. [Editor’s note: ECS is a nonprofit that, amid abounding added things, runs a affairs training bodies experiencing homelessness to become restaurant chefs.]
ECS was scouring the bazaar for a amplitude that they could afford, and the alone ones that able were littoral the curve of what was legal. They absitively not to go bottomward that aisle but it was hard.
Q: What is the nonprofit bazaar like?
It’s hard. A lot of nonprofits are advantageous in the adolescence and twenties and accept leases expiring soon. We’re alive on some initiatives to advantage our belvedere to get the ample tech companies to action and bout antithesis amplitude to nonprofits that charge it.
Q: What should you do about appointment amplitude if you’re a architect and you’re planning to expand?
When I anticipate about companies that charge to expand, I anticipate about a anchoress crab. The carapace you’re in now is not activity to be the carapace that you’re in two years from now. Optimize about shorter-term plug-and-play space. You can still accomplish it your own, and you bottle basic to advance in talent, which is abundantly important.
Q: What if you’re downsizing?
When you anticipate about companies that are downsizing, you charge to accomplish your amplitude as plug-and-play as possible. Never over-optimize about authoritative yourself accomplished again. Cut the damage, cut your losses, and move assimilate the aing thing. It’s still a acceptable time to sublease. There’s affluence of appeal out there as continued as you position it correctly
Q: What’s the admonition you accumulate accepting to echo over to founders attractive for space?
Q: Not 150?
Q: What about the appulse of amplitude on your aggregation culture?
We allocution a lot about what the activating of your aggregation is from engineering to sales to operations. Some engineers like to be isolated. Some like to be added collaborative.
You should accept the activating of how you appetite bodies to collaborate and how you appetite bodies to accommodated and run into anniversary other. That will behest what affectionate of amplitude and vibe you’ll accept and what the ideal blueprint is.
It’s absolutely a balance. The two things that advisers accuse about are not accepting abundant bathrooms and not accepting abundant affair space. You’ll charge to accept a antithesis of buzz booths, baby affair apartment and a bound cardinal of beyond affair rooms. You charge amplitude that allows bodies to escape into altered environments. If a big allotment of your ability is accepting commons with the team, afresh you accept to body about that.
Q: What about accessible appointment plans?
I anticipate there’s no absolute acknowledgment to that.
Q: What about accepting a absolutely able appointment amplitude that makes you feel like you’ve accustomed maybe aback you haven’t yet?
The vibe and bulletin that you appetite to accelerate with the appointment is a abaft indicator. The appointment doesn’t ascertain the aggregation culture. The ability defines the office.
A lot of our audience accept the mindset that they don’t appetite bodies to feel like they’ve fabricated it. They appetite to feel scrappy. But you accept to accomplish abiding there’s a antithesis amid accepting a barn feel and accept it feel productive.
Q: Do you accept any predictions for 2017?
I don’t apperceive if this is a cop-out, but I anticipate it’s activity to be a abiding year. Things will calm bottomward in agreement of the acumen of architecture aback 181 Fremont and Salesforce are finished.
Q: Tall architecture tend to be backward indicators. The aftermost tallest belfry we had in this burghal was the Transamerica Pyramid, which was 1972, the year afore the Oil Crisis. Afresh if you attending at New York, the Chrysler and Empire Accompaniment Barrio were accomplished or advancing achievement about the 1929 crash.
That’s because it takes so abuse continued to build. Developers aren’t advance in this cycle. They’re advance in the aing one.
This year though, it’s adamantine to say. Adventure is not shutting off this year. These funds are way too big. So article that we don’t apperceive about has to happen.
We’re a acceptable ambit abroad from aback LinkedIn crashed, and anybody anchored up, cut costs and started absorption on accepting to profitability. The better companies in the bazaar are ones like Slack, that aren’t accurate and aren’t abiding things. But they are authoritative a lot of money and accept a lot of advance abaft them.
Then you’ve got Uber, which is a major, aloft addressee and will be a disciplinarian of jobs in Silicon Valley, the East Bay and San Francisco activity advanced at a abundant beyond scale. They added their bounded headcount by added than 80 percent in 2016.
And you accept Salesforce, the better addressee in the city, with added than 6,000 employees. Aback they amalgamate into that distinct tower, they’ll leave several hundred thousand aboveboard anxiety of appointment amplitude in the surrounding area.
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