How The Supply of Creative Office Space Can Expand Very Rapidly

The 2001 LA Times article, “More Westside Office Space Turns Up in Latest Tally,” discusses a study in 2001 by Grubb & Ellis that showed a significant underestimated supply of Westside office space due to creative office conversions.

Warehouse conversions to creative office space are small and numerous, making it extremely difficult to track. Likewise, supply statisticians may also underestimate  the supply of creative office space.  Conventional office space can be converted to creative office space for $50 to $80 per square foot in two to eight months by opening ceilings, exposing the structural architecture, and installing creative office features.  Because it is so easy for traditional office space to be converted into a creative office, the supply of creative office space can expand rapidly.

In Los Angeles, brokers call these spaces “soft creative” because they lack the full intrinsic drama of single level converted warehouses but can still provide the creative purpose for certain companies.  Currently, in San Francisco, owners are working feverishly to convert conventional offices as well as older moth ball buildings into creative spaces and vacant land into new highrise creative properties.

When it comes to creative space production, we are all “Houstons”. The last time around, the real estate investment and leasing community failed to accurately account for the full amount of creative office space.  The industry needs to count the supply more accurately this time and hope the demand increases and sustains with equal fervor.

Understanding the Office-Less Company

Rachel Emma Silverman’s article, “Step into the Office-Less Company,” discusses a new kind of company where employees work from home.  Automattic is an example of one such company in which employees use social networking, cloud storage, and video conferencing to communicate with one another.

While Automattic does have an office in San Francisco, the company heavily relies on internal blogs rather than traditional office buildings.  Because of this, Automattic is able to reach out to a larger and selective workforce regardless of workers’ location and timezones.  This also allows work to be completed at any hour of the day, while the company saves enormously on real estate costs.

Companies like Automattic claim that employees are more effective in this type of environment without interruptions, but also complete work with less instructions.  While only 2.5% workers currently work from home, this new type of company is still worth noting.

For further discussion, the original Wall Street Journal can be accessed here as well as read below:

The Web-services company Automattic Inc. has 123 employees working in 26 countries, 94 cities and 28 U.S. states. Its offices? Workers’ homes.

At Automattic, which hosts the servers for the blogging platform WordPress.com, work gets done wherever employees choose, and virtual meetings are conducted on Skype or over Internet chat.

The company has a San Francisco office for occasional use, but project management, brainstorming and water-cooler chatter take place on internal blogs. If necessary, team members fly around the world to meet each other face to face. And if people have sensitive questions, they pick up the phone.

Web firm Automattic has 123 employees in 94 cities—and everyone works at home.

Having a remote workforce lets companies tap into a wider talent pool not limited by geography. Firms can also save money on real estate, though sizeable travel budgets may partly offset that.

Nobody knows for sure how many completely office-less companies there are or how fast their ranks are growing, but management researchers say such firms are still rare. Today, just 2.5% of the U.S. workforce considers home its primary place of work. But that number, which is based on census-data analysis, grew 66% from 2005 to 2010, according to the Telework Research Network, a consulting and research firm. And increasingly, employees at companies with physical offices are choosing to work remotely or forming virtual teams with colleagues world-wide, thanks to rapid advances in video, social-networking, cloud storage, and mobile technology.

Many far-flung companies also have nonhierarchical management structures, providing teams and workers the authority to make decisions and complete tasks with light supervision.
But working from home isn’t for everyone. “Some people hunger for the personal contact,” says Michael Boyer O’Leary, an assistant management professor at Georgetown University’s McDonough School of Business. Dr. O’Leary says that face-to-face contact is most critical for new employees or when people without a track record together launch a new project.
Other staffers have difficulty creating boundaries between work and home life, even missing the mental and physical transition of a commute, says Jay Mulki, an associate professor at Northeastern University’s College of Business Administration who studies virtual workers.

Automattic: How they make it work

  • Assignments with deadlines are posted on internal blogs.
  • Meetings with team members take place on blogs, Skype or Internet chat.
  • Internal ‘water cooler’ blogs enable workers to engage in virtual chitchat.
  • There is a ‘grand meetup’ once a year for all employees to gather face to face.

Source: the company

He says that one remote worker he studied got into his car every morning, drove around the block and then returned home to clock in.

Lori McLeese, who heads Automattic human resources, says that its hiring and orientation processes are key to creating a cohesive culture. The company requires top applicants to work on a trial project for a few weeks to see if they are a good fit. New hires, regardless of position, must work in customer service for three weeks to create a unifying employee experience and have direct customer contact.

The company lives by a philosophy of “overcommunication,” says Ms. McLeese, to help proactively quell any misunderstandings and provide workers with direction. Employees mainly transmit messages via internal blogs, dubbed P2s, which also act as a virtual water cooler. When misunderstandings occur with text-based chats, participants are encouraged to pick up the phone.

But because staffers are in so many time zones, work is often done asynchronously. Team members work their own hours—the company has a lot of night owls and early risers—to meet project deadlines. If someone misses the mark, the team leader or another staffer will reach out to the employee to figure out what went wrong.

The company also organizes regular face-to-face get-togethers of teams, allowing workers to fly to meet each other in convenient locations, and an annual, week-long “grand meetup” for all employees. Ms. McLeese says that after long stretches without seeing each other face to face, the meetups can be emotional. “People are giving each other hugs at the airport,” she says.

Mat Atkinson, the chief executive of the design-review software company ProofHQ, says that managing “distributed” teams requires 25% more effort than a face-to-face team would because managers must pay closer attention to whether workers are motivated and fully understand tasks and business processes. “There isn’t the opportunity to just pop into someone’s office,” says Mr. Atkinson, who is based in London and has 32 staffers based in 17 cities around the world.

But Mr. Atkinson says that employees are more productive because they have no commutes and fewer interruptions. And he says that being virtual costs about 50% less than having fixed real-estate costs.

Kalypso LP, an innovation consulting firm, has 150 employees around the country and in Europe but no corporate offices, says founding-partner Bill Poston, who works from his home in Boerne, Texas, when he is not at client sites.

When the firm was founded eight years ago, Mr. Poston says the decision to go office-less was financial. But now, being virtual is a matter of choice, though he points out that the company isn’t a good fit for people “who are uncomfortable with ambiguity.”

Mr. Poston also says that employees are far from isolated. Workers communicate constantly via instant messaging and email. And teams of consultants see each other almost daily when meeting with clients. The company also flies employees to an annual meeting in September, and it transports workers and their families to “family fun” weekends every June. In addition, employees can fly to meet each other whenever necessary.

Not everyone believes in virtual companies. Last year the founders of Zaarly Inc. debated whether to operate virtually or open an office for the fledgling online marketplace for local services.

The firm opted for the latter, says Shane Mac, director of product for Zaarly, which now has 43 employees, most of whom work in the company’s San Francisco-based office.

Although the firm has some remote employees, Mr. Mac says that making decisions is faster when someone is sitting next to you, and it’s easier to keep employees in the loop and brainstorm together over a whiteboard. “You can’t create true serendipity over IM,” he says.

To find out more information on this topic, contact the author of this article, Rachel Emma Silverman, at rachel.silverman@wsj.com.

LA’s Silicon Beach in the News

Check out the latest news about LA’s burgeoning Silicon Beach Area:

USA Today: http://usatoday30.usatoday.com/tech/news/story/2012-07-15/silicon-beach/56241864/1

LA Times: http://articles.latimes.com/2011/dec/11/business/la-fi-cover-la-tech-20111211

Jason Nazar’s blog: http://www.jasonnazar.com/2008/11/23/a-tale-of-two-tech-cities-%E2%80%93-silicon-valley-vs-los-angeles/

Will Parking Panda Come to Los Angeles Next?

After offering their services to drivers in Washington D.C. and Baltimore, Parking Panda has gone live in the Bay Area.  Here is another disruptive San Francisco based technology that enables garage owners and homeowners to rent out their unused parking spaces (think of homeowners with empty driveways during the day), and in turn, allows drivers to find those spaces and submit rental requests.  TechCrunch outlines the exciting details for commuters in their article published today.

Image courtesy of TechCrunch

The Parking Panda application allows users to view available parking spaces based on their current driving location.  Parking Panda has only gone live in three cities for full functionality for parking spot listings and rental requests.  In 25 other cities, Parking Panda offers a parking finder function for drivers.  Parking Panda has plans to go live in Boston, Philadelphia, Austin, and another west coast city within the next few months.

Parking Panda’s website and application has an easily accessible interface that allows users to either “Find Parking,” “List a Space,” and a link that explains “How it Works.”

Scarce parking in Los Angeles has long been an issue, especially on the Westside.  Numerous tech, media and digital tenants are searching for ways to find more parking spots for their employees on a daily basis.  In August, we published a blog, “The Coming Collision of Office Densification and Parking in Los Angeles,” where we described the parking conundrum that most of the Los Angeles workforce has to deal with.  Parking Panda may help alleviate apart of this dilemma, and we hope to see this promising company expand to Southern California in the near future.

RidePal: An Alternative for LA Commuters

The latest article from TechCrunch introduced RidePal, a company that recently received $500K from 500 startups.  RidePal is part of the collaborative consumption movement that originates out of social networking in the Bay Area. Referred to as a “Google Shuttle for the rest of us,” RidePal is an innovative idea that should also be brought to Los Angeles.  It has the potential to alleviate the parking conundrum and terrible commutes that plague Los Angelenos.  The service allows companies, employers, and building owners to share the cost of shuttle services to transport employees to and from work.

Image courtesy of RidePal’s website

RidePal is a system that offers shared commuting buses equipped with Wi-Fi as well as a ticketing, reservation, and management platform.  It currently uses a total of 15 routes that link San Francisco with the east bay, south bay, and peninsula.  RidePal partners with several bus companies and builds new routes based on the demands and needs of companies and their employees.  The shuttle program has been especially attractive for growing companies that are looking to expand their workforce because it is easier to retain and recruit employees from outside the area.

Not only is RidePal an eco-friendly method of transportation, but it also benefits both companies and employees.  Businesses that choose to bring this service to their employees don’t need to pay for the entire bus, but only pay for the capacity they need, which allows them to save costs.  For employees, RidePal offers the opportunity to spend their normal commuting hours surfing the Web, completing work, or just enjoying newly freed up time that was spent driving before.

If RidePal was brought to Los Angeles, Culver City, for example, could finally put to use their underutilized city and privately owned parking lots.  The shuttle bus would provide transportation at these parking lots as well as to the Expo stations.  It would only take one major employer without sufficient on-site parking and the Expo to begin this service to offsite parking lots and the Expo. The cost could be shared with other employers who want to also use a shuttle service for this purpose.

After San Francisco, RidePal aims to eventually bring their service to other top urban clusters.  Hopefully the program’s success in Northern California will influence companies in Los Angeles to take a second look into similar ride-sharing programs for their employees.

San Francisco Mid-Market Makes a Comeback

When PMI first started looking to purchase office buildings in 2003 in San Francisco, a couple of brokers tried to sell us buildings in San Francisco’s Mid-Market areas.  They said it was going to make a comeback.  Most others said that they had heard that for years.  The area had a large population of homeless people, homeless shelters, and single room occupancy housings.  We were told by all the cognoscenti to stay away.

In 2010, San Francisco boomed with tech tenants.  Super star tenants found it difficult to find very large blocks of space in prime areas like SoMa.  One of our tenants, Twitter, started in 6,000 square feet.  They were a runaway success and started shopping for 150,000 square feet with expansion options for another 150,000 square feet.  Twitter threatened to move out of San Francisco because of a city payroll tax that would tax stock options upon their exercise.  San Francisco Mayor Ed Lee set up Mid Market as a payroll tax-free zone.  Real Estate magnate Shorenstien Properties then purchased a million square foot clunker of a building in Mid Market, planned a creative office renovation, and made Twitter a deal they could not refuse.

Another one of our tenants, Zendesk, moved to Mid Market because we were out of space in our SoMa building.  Zendesk got a great deal and achieved their rent objectives.  Yammer, who is also our tenant, moved into the same building that Twitter did after Kilroy wanted too large a letter of credit as security (Yammer was recently purchased by Microsoft–who knew).

So why is it that Mid-Market succeeded this time?  Primarily it is because Twitter became a magnet that attracted other tech tenants.  Mayor Lee and Shorenstien Properties offered Twitter such a fantastic deal they would have been crazy not to accept it.  This was done during a market where creative space was running low because tech business was booming.

In the New Geography of Jobs, Berkeley professor of economics Enrico Moretti comments that super star companies attract other super stars and even “wanna-be” companies like a magnet.  Indeed, he attributes the success of Seattle in tech to the fact that Bill Gates decided to relocate there to scale Microsoft.  In San Francisco, Twitter was the super star and it attracted other companies, like Yammer, among others.  The payroll tax-free zone and a landlord willing to give a cost leader to attract a super star helped.

Here is an article from Reuben and Junius expanding more on the rebirth of Mid-Market.

Why Tech Firms are Moving to San Francisco

In a recent San Francisco Business Journal article, Terry Cunningham, President and General Manager of Evault, a cloud back-up and recovery service, explained why the company moved its 100 person Emeryville offices to San Francisco.

Cunningham said one of the great advantages of relocating to San Francisco is that he has a “wider pool from which to recruit, because more people want to work in the city than in the South Bay, and the city is centrally located, making it easier commuting from the East Bay and other spots.”

Plus, Cunningham said San Francisco is just “hipper” than the South Bay.

“San Francisco is cool, and we were just in a wasteland down south.  There was nothing cool in the particular location we were in.  You had to get in your car to drive for lunch.”

Cunningham has been reveling in the walkabillity of his new neighborhood.  The environment, coupled with the new office’s design, makes for a “more intimate working culture, in which people get to know each other better,” he said.

Kitchens, Lounges, and Break Areas Expand in SoMa Offices

Couches and Lounge Chairs Provided for Employees

No matter how big the kitchen and break area are in our office suites, the tenants in San Francisco’s South of Market (SoMa) expand them.  Tech tenants are designing more informal work areas and collaboration areas within their space.  These spaces serve as an internal coffee shop or lounge.  These areas can also provide an alternative space from the rows of workstations or tables for employees to work.  Due to the variety and design in these suites, it can be hard to differentiate whether one is in a hotel lobby, coffee shop, fraternity house, or office.  Some tech firms host group lunches to encourage collaboration and require a dining space within an office suite to accommodate this activity.

Here are several pictures from our recent suites ranging from 10,000 to 12,000 square feet displaying these new, collaborative additions.

Oversized Break Area and Kitchen

Dining Area for a 12,000 SF Tenant

Couches for Informal Work Area

Working on a Couch in the Reception Area

From the Dark Days in SoMa to a Bright, Booming Future

In 2003, after the dot-com bust, PMI sensed an amazing purchasing opportunity in San Francisco. The area south of Market, known as SoMa, had vacancies reaching upwards of 40%, leasing brokers  began describing the area as “toxic.” SoMa looked like a promising area to recreate the magic acquisitions PMI assumed in the Los Angeles Westside during the mid-90s property grab.

By 2003, entertainment, advertising, and media companies on the Westside of Los Angeles had helped the area stage a rapid comeback from the tech crash. Late in 2003, PMI sold a 75,000 square foot Santa Monica creative office property to a Texas-based realty pension adviser. It was the first time an institutional buyer purchased a Westside creative office building. Soon after, the buying frenzy started and creative offices were being bought and sold at record prices. Comparatively, in SoMa during 2003 and 2004, only residential converters were buying creative office buildings and for under $125 per square foot.

PMI targeted San Francisco as a prime place to purchase creative office buildings for several reasons:

  1. The city has an incredibly large workforce of highly educated individuals.
  2. The city has one of the greatest concentrations of software engineers in the world.
  3. Two of the top universities in the country are located in the area.
  4. The city is dominant in venture capitalism.
  5. We took into account Richard Florida’s “Creative Class,” in which he argues that the world’s power and wealth will be concentrated in super regions of knowledge workers. We agreed with his theory and believed San Francisco  fit the paradigm perfectly.
  6. We considered the study of the history of innovation, which shows that the discovery of disruptive technology tends to end in a bursting of bubbles and is followed by an even greater and more mature expansion of the technology (a cycle that can happen many times).

While San Francisco seemed a great arbitrage, we were too frightened to buy anything in 2003. It wasn’t until late 2005 that we bought our first property, with the tenants and cash flow in place at the time. The deals were not as good as buying empty buildings, but they were a lot better than the creative office deals on the Los Angeles Westside. Rents climbed from $22 modified gross per square foot in 2005 to $36 modified gross per square foot in 2007and then collapsed below $22 modified gross per square foot in 2009.

With rents at an all time low and a building half vacant, we went on a search for the best start-up companies we could find and made them deals they could not refuse. Our first two takers were Eventbrite and Yammer. In another building, we leased a space to a startup called Twitter.

As described in this article from the San Francisco Business Times, things got much better in San Francisco. Rents are now well over $40 modified gross per square foot. The arbitrage between San Francisco and the Los Angeles Westside is no more. REITs and institutional investors dominate the business now.

“My warning,” says Jeffrey Palmer of PMI Properties, “is that this is a very volatile business. At some point in the cycle–both on the rise and fall, what you are experiencing may be volatility.”

Forbes Blog Attempts to Crown Los Angeles Ahead of Silicon Valley in the Startup Race

We might be so bold as to say that Los Angeles surpassing Silicon Valley in the startup race is not going to happen.  However, this recent article in Forbes does not actually discuss the placement of Los Angeles or Silicon Valley in the startup race. Instead, it speaks of the resistance one marketing tech worker had in moving to Los Angeles from San Francisco.  Despite the misconceptions that some Silicon Valley residents may have about the tech and startup scene in Southern California, this article points out that there is a lot of promise in Los Angeles.  A good argument that is made in the article is if L.A. wants to gain a traction on a higher spot in the tech startup race, there needs to be more tech talent that is interested in entrepreneurship.

All differences aside, we have a lot of tech in Los Angeles.  If aerospace technology were to be included, we may blow away Silicon Valley.  During the dotcom boom, Los Angeles had the number four spot in venture capital funding behind Silicon Valley, Boston, and New York according to the National Venture Capital Association.  Guess What?  We still have the number four spot.  As the technology industry comes back as a whole, Los Angeles tech is coming back as well.  We are rebuilding the infrastructure we had during the dotcom boom.  Although some valuations may appear bubbly–venture funding does not even come close to rivaling the dot com boom.  Venture funding reached $99 billion in 2000 versus $28 billion in 2011.

Los Angeles will not catch up to the Bay area anytime soon in technology and startups, and conversely, the Bay Area will not catch up to Los Angeles in the movie and media realm.  Both have too much history, infrastructure, institutions, and alumni in each of their respective areas of domination.  Los Angeles can excel in the niche tech areas of content convergence, such as Hulu and Demand Media.  LA can also do extremely well in advertising and marketing tech (Adly), and ecommerce (Shopzilla, Fandango).