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.

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.”

Wall Street Journal Spotlights PMI Properties’ Harrison Building

PMI Properties’ newest acquisition, 642 Harrison in San Francisco, was featured in a Wall Street Journal article last month.  The article spotlights the burgeoning SoMa district in San Francisco and the rapid growth that buildings in the area are experiencing within the last year.

PMI Properties was able to snag Harrison before the prices started to rise in SoMa. Compared to other agencies who paid $330 and $423 a square foot, PMI was able to purchase Harrison at $265 a square foot. The early mover’s advantage definitely was key in this transaction.

In order to attract new tenants to the space at Harrison, we renovated the second floor, created new PMI Properties banners for the outside of the building, and appealed to tech and digital media companies with vintage Time magazine posters of a young Bill Gates and Steve Jobs in the foyer. With the diminishing vacancy rate in the SoMa district, businesses are searching frantically to lease space.  The pricing game has become increasingly competitive as well, as evidenced by PMI’s recent lease negotion process with our newest tenant, Opower.

Overall, SoMa has blossomed into a tech and digital media mecca, with PMI’s Harrison right at the center. We are thrilled to be providing space to creative tenants who continue to cultivate amazing ideas and innovations.

To read the entire Wall Street journal article, please click here.

Here’s a First: San Francisco Rescinds Parking Requirements on two PMI Buildings

PMI recently applied for a variance which would reduce the parking requirements on two of its office buildings in the SoMa district of San Francisco.  The City granted the variance on 625 Third Street and 539 Bryant citing that San Francisco has substantially improved its public transit in the area.  The City also recently changed the parking zoning requirement from a minimum number of spaces required to a maximum number of spaces allowed.  Both properties are of easy walking distance to the Caltrain and within a block of municipal transit which runs every four minutes for a ten minute ride to BART.  Transit options will exponentially increase for the two properties.  The City has commenced construction on the new fourth street subway which will connect Caltrain SoMa with Chinatown with a stop near BART.  PMI has also contributed to the transit-friendly situation.  At PMI’s buildings, arrangements have been made with a garage near the Embarcadero BART Station for tenants to park their bikes at the garage overnight.  Tenants can then take the BART into the city and ride their bikes the rest of the way to work.  At 410 Townsend in SoMa, near Caltrain, PMI made arrangements for Zipcar, a car sharing company, to keep cars in its garage for the benefit of their tenants.

PMI Properties is an owner and investor in creative office buildings on the Westside of Los Angeles and in San Francisco.  Availabilities include 2,000 square feet in Santa Monica and Marina Del Ray and up to 18,000 square feet in Culver City.   For more information, go to http://www.pmiproperty.com.