By Garrick Brown, Vice President of Research – West Region
Wolf Richter’s piece in Business Insider, “San Francisco’s Housing Crisis is Reaching Epic Proportions,” is self-explanatory and I have been a broken record on this topic so won’t waste your time with my ranting about this topic again this week. Let’s just say that my opinion that this is currently the greatest single threat to local economic growth hasn’t changed and this article does a skillful job in explaining some of the reasons why I think this.“
Rob Leuty’s “Tight Biotech Real Estate Market Shifts Landscape and Players,” just does a great job of not only nailing what is happening in the marketplace today but of what this trend means for tomorrow. If I have only one complaint it is that it might leave one with the sense that the region’s biotech marketplace is all about Mission Bay. The fact is it really has been about San Mateo County and that Mission Bay was to be the new emerging hub in the region. Only one thing has screwed that up and it has been insistent tech demand that has resulted in an awful lot of planned biotech space ending up leasing to tech tenants instead.
The numbers paint a pretty clear picture if you look at the San Mateo County R&D marketplace. We are currently tracking a vacancy rate of just 4.8%. This is down from 7.9% one year ago and reflects a massive decrease from the 10.6% rate that was in place at the close of 2013. This rapid decline in availability has actually stifled growth on the Peninsula. As the biotech sector has slowly worked through the patent gap of a few years ago and returned to growth mode, there has simply not been much in the way of available quality space in the marketplace. This is why the average asking rate for available R&D space that we are tracking in the San Mateo County marketplace is now $2.75 per square foot (on a monthly triple net basis). Now keep in mind one year ago this metric was $2.26 per square foot. That is a single year jump of more than 21%, but it’s only half the story. This metric just measures the asking rents of what is available in the marketplace. With sub-5% vacancy most of what is left is Class B or C space. Top quality space with top biotech functionality (such as clean rooms or other amenities) can now often lease at $5.00 per square foot or more.
You can check out our latest full report on the San Mateo County R&D market by clicking here.
What I like most about Rob’s piece is he nails what is going on… the emergence of a stronger biotech market in the East Bay (there are already significant pockets in Emeryville and Alameda) is the likely outcome. Certainly, the North Bay remains in the mix to lure some of this growth, but the East Bay is still where the marketplace can react most quickly, most economically and it remains the place with the biggest upside in terms of proximity to workforce. And that last factor only continues to increase thanks to the trends outlined in the housing crisis article… All systems are go for Oakland and the East Bay… Oakland isn’t going to be the next Brooklyn, it IS. Now all that needs to happen is for the city to find a way to keep it’s professional teams… But be honest, does anyone even really want to keep the Raiders?
Next up are two articles that do a great job of demonstrating what happens when business reporters get things wrong. The first ran two days ago. In “When Tech Came To the Tenderloin,” Quentin Hardy of the New York Times details some of the challenges we have seen here in the Bay Area as neighborhoods have undergone rapid change in the face of Tech Boom 2.0. The only problem is he combines and mixes and matches the geographies of the Tenderloin and Mid-Market and SOMA as if there are no differences between the three.
If you’re a local, you know there are huge differences. Now, that being said, can you forgive anyone for not understanding the insane San Francisco tradition of naming neighborhoods down to the individual block level? Seriously, we may be one of the densest cities in the United States in terms of population, but are we the densest also when it comes to micro neighborhood boundaries?
For example, I have a very good friend we all call Captain Yacht Rock. He doesn’t actually have a boat or wear a captain’s hat, a la Darryl Dragon or Thurston Howell, III—although he should. No, we call him Captain Yacht Rock because he wears only Ralph Lauren and has the weird habit of always trying to play 70s soft rock songs when you are around him. Captain Yacht Rock lives near Taylor and Bush Streets and will punch you in the face if you call his neighborhood Upper Tenderloin.
I was at a party with him where he had just commandeered the host’s stereo with a really bad Pablo Cruise, Toto, Christopher Cross and 1980s Styx mix tape when I made the mistake of asking him life was treating him in the Upper Tenderloin. “It’s Lower Nob Hill, damn it! Remember in ‘It’s a Wonderful Life’ how every time you hear a bell ring it means an angel got their wings? Well every time you use the word ‘Tenderloin’ it means that someone in my neighborhood loses $100 in the value of their condo. Don’t compare my place to anything two blocks down the hill. It’s gravity—bums roll downhill.”
Of course, the last article of the week is Randy Shaw’s “New York Times Gets Tenderloin Wrong” from the Chronicle’s BeyondChron.org site. This piece does a great job of pointing out the factual inaccuracies in Hardy’s New York Times piece. But does Shaw get it right either? Mostly… He is certainly right about the lack of tech companies in the market for Tenderloin space… because there is NO (well, very little) Tenderloin office space out there. If I have a slam here it is that this piece takes the typical community activist stance… I get being pro-community and I certainly agree that there are a lot of interesting things happening with new apartment projects as well as more than just a handful of new restaurants and retailers looking to reshape the area. But let’s not get ahead of ourselves here. The Tenderloin is what it is… Hardy in the New York Times may have erroneously confused SOMA’s tech boom with the difficulty of cleaning up the Tenderloin but it doesn’t change the fact that this area of town has a well-earned stigma attached to it.
That stigma, for many, will be an opportunity in the years to come. Interesting things are already happening (particularly when it comes to multifamily and a few adventurous restaurateurs) in San Francisco’s roughest neighborhood. The Mid-Market makeover will also mean some further spillover. But until the average San Franciscan feels safe walking through… let’s say the intersection of Taylor and Jones IN THE MIDDLE OF THE DAY… then expect a myriad of challenges for the first wave of new tenants looking to reclaim the Tenderloin. Regardless of the media spin, that’s just a fact folks.
This post is commentary from the latest weekly edition of our Bay Area Research Rant, which you can subscribe to for free by e-mailing email@example.com.
Garrick joined Cushman & Wakefield (formerly DTZ / Cassidy Turley) in October 2010. He serves as Vice President of Retail Research for the Americas. He speaks frequently at industry events and has been a keynote speaker at symposiums, conferences and market forecasting events for groups like the Appraisal Institute, Urban Land Institute, CREW, ICSC and PRSM. He is also a member of Lambda Alpha International, an invitation-only land use society for those who are involved in the ownership, management, regulation and conservation of land, but also those who are involved in its development, redevelopment and preservation.