Tech money drives San Francisco building boom, pushes others out

SAN FRANCISCO -- In 2013, Kathy Ko Chin looked at her business neighbors and saw change. Entire floors were packing up into moving trucks around the medical building at 450 Sutter Street, a few blocks away from the city's downtown Union Square plaza.

The rent was getting too expensive. Chin, a tenant there for a decade, feared the same fate awaited her health-assistance organization, the Asian and Pacific American Islander Health Forum. When she called her landlord to ask about a new lease in February, her fears were realized: She was told her rent would rise 40 percent to $52 per square foot in 2015.

"I said, 'We're a nonprofit, and we've been a good tenant for years,'" Chin recalled. "'Is there anything we can do? Can you reconsider?'" The answer: No dice.

By April, the organization and its 26 employees moved across the San Francisco Bay to Oakland, California. "We were priced out of San Francisco," Chin said of the city her organization had called home for 30 years.

She's just one of the many being squeezed out by the most dramatic construction boom in the country, and it's all happening in a city that measures less than a fifth the size of New York. Every month, more (mostly tech) companies are looking to stake their claim in a city growing skyward. The Bay Area's primary economic driver for more than 30 years, the tech industry is fueling a surge in San Francisco construction.

And rents are skyrocketing.

The average asking price in San Francisco's central business district (CBD) is now about $66 per square foot, according to property management company Jones Lang LaSalle. Five years ago that same square foot cost about $36. Office rents here have soared 83 percent in five years, nearly four times faster than downtown New York.

San Francisco is now second only to midtown Manhattan as the most expensive CBD in the country to seat a business, but not by much.

If it feels eerily familiar, it is. Just as they did during the dot-com bubble of the late '90s, real estate developers are betting on tech's insatiable appetite for work space.

Of course, things didn't work out as planned back then. When the bubble burst in mid-2000, downtown San Francisco hollowed out just as developers were completing a record 6 million square feet of new office construction, according to data from the CoStar Group, which provides research to commercial real estate developers.

Developers say they're being smarter this time around. Now, they're signing tenants into leases before they even break ground. "It's more stable right now because it's not outright speculative," said Colin Yasukochi, director of research at commercial real estate broker CBRE.

Even so, analysts say the boom-town feel likely won't let up anytime soon. As companies continue to demand a limited number of floors, landlords can charge higher rents because they know someone -- enter tech companies -- can afford it. But most businesses cannot.

Nowhere to go but up

As is traditional in cities situated on a peninsula or island, the goal of commercial real estate is to build high and build fast. Some of the world's busiest cities are prime examples: Hong Kong, Manhattan and Mumbai.

Right now, San Francisco is building more office space than any other North American city, with almost 5.2 million square feet currently under development, says real estate consultancy Colliers International. That's enough to tuck in 90 football fields, with a little square footage left over.

Developers in San Francisco are slated to finish construction on 2.9 million square feet of new office space this year alone, according to the CoStar Group data. That's up from 979,000 square feet in 2014 and 503,000 in 2010.

Before long, the city's downtown skyline, punctuated by the Transamerica Pyramid, the Embarcadero Center buildings and historic Coit Tower, will include new buildings emblazoned with some of tech's hottest names.

One of them is the 61-story, 1.4 million-square-foot Salesforce Tower, named for the anchor tenant that will occupy almost half the building when it opens in 2017. With 5,000 local employees (out of more than 15,000) Salesforce.com is the largest tech employer in the city. It soon will become San Francisco's largest tenant, occupying more than 2 million square feet spread across offices leased in two towers and a 41-story building it bought last year. The Salesforce Tower will be city's tallest building at 1,070 feet, with an equally high rent, as much as $105 per square foot, according to JLL data.

"The hottest talent out there wants to be at the epicenter, in the city -- not stuck away on some office park in the suburbs," Salesforce senior vice president of real estate Ford Fish said in an email. "That's why you've seen many tech companies start to open offices in San Francisco."

Salesforce isn't the only one based here. Airbnb, Dropbox, Square, Twitter, Pinterest, Uber and Zendesk all have headquarters in the city. Silicon Valley-based LinkedIn is leasing 450,000 square feet in a 26-story building now under construction and slated to be finished in early 2016. Google installed some of its employees in 243,000 square feet of office space across the street from San Francisco's Embarcadero waterfront. Even Apple, based a little under an hour to the south in Cupertino, is establishing its first satellite office in the city. (Apple is subleasing its space from CBS Interactive, which owns CNET News.)

Then there's the Transbay Transit Center project, a $4.5 billion downtown complex of glass, steel and parkland slated for completion in 2017. The state-of-the-art transportation hub will connect San Francisco to eight Bay Area counties, including Silicon Valley whose edge starts about 20 miles to the south.

But ask anyone who lives or works in the city, and they'll tell you: Silicon Valley feels like it's here, already.

Everything else squeezed out

The Asian Pacific Institute on Gender-Based Violence is a small nonprofit, with just 10 staffers. But they're a busy group. They advocate, raise funds, research and train people on how to handle sexual violence and trafficking among Asian immigrant populations, a large demographic here in the Bay Area.

Since its inception in 2000, the organization occupied space in the same Union Square building as Chin's nonprofit. That is, until June 2014. It was one of the neighbors Chin watched leave.

Director Chic Darby said the group was "pushed out" by soaring rents and forced across the bay into Oakland. The average asking price in Union Square is now $51 per square foot, up from $27 in 2010. The organization is in a larger, more open space now, and the small staff is happy there, Darby says.

Even so, she worries about San Francisco. The office real estate market is a math problem. "When you have that kind of subtraction from San Francisco, then you want to be sure that something keeps getting added," she said. "What are the additions?"

The answer is tech companies. The subtractions are everybody else.

Rising rents have forced businesses that aren't flush with tech's cash -- including galleries, restaurants and nonprofits -- to move to cheaper neighborhoods or relocate elsewhere in the Bay Area. Don Tamaki, an attorney at Minami Tamaki who's helped Darby and others relocate, said the "astronomical increases" in office rent -- up 94 percent citywide since 2010 -- have caused an "exodus."

And that's a problem for the city itself, said San Francisco Supervisor Jane Kim. "Folks who serve seniors and pass out food to the homeless really need to stay in the neighborhood they're in," she said.

That's one reason the San Francisco Board of Supervisors last year established a $2.5 million rent stabilization fund to help service organizations, like food shelters or emergency care centers, according to a report by the city's working group on nonprofit displacement. The board also set aside $2 million for arts organizations. The Kenneth Rainin Foundation, whose mission includes "sustaining the arts," committed $5 million over five years to help community arts organizations find space.

Even with the city's support, though, many organizations are feeling the pinch. Almost 2,000 nonprofits, about a quarter of the total, have either shut down or moved away from 2011 through 2013, according to a report by Bloomberg.

"It puts a hardship on the nonprofit sector," said Surina Khan, CEO of the Women's Foundation of California, which raises grant money for a variety of organizations focused on equal rights for women.

The foundation moved from San Francisco's Financial District to Oakland in March.

"What does it mean for the people who rely on neighborhood-based organizations?" she asked. "What does it mean for the city and the entire Bay Area?"

For now, it means growth, no matter the cost.