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.