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Bay Area Research Rant: Uber Deal Marks East Bay Milestone

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Garrick Brown, Vice President, Research – West Region

I’m going to keep this week’s commentary Oakland CBDshort but sweet. First off, no doubt about it… the biggest news of the week was Uber’s deal to take the former Sears Building in Oakland. Now for the past year and a half we have been talking about the idea of just what would happen if one of the region’s tech megaplayers (Apple, Facebook, Google, LinkedIn, Toshiba, etc.) were to land in the East Bay. These are players that, wherever they sprout up, bring with them a retinue of smaller players and startups who want to cluster near the whales. Uber doesn’t technically fall into that category, but we see the same basic impact happening.

The fact is that for similar space you are going to be paying $65 PSF or more in San Francisco for space that would go for $40 PSF of so in Oakland. Add that to the fact that there is little in the way of existing and available office or R&D space in San Francisco and you have a no brainer. The challenge, of course, has been that one of the driving factors behind the amazing performance of the 101 Corridor markets (from Mountain View to Market Street) has been that sticky issue of clustering.

Until recently, if you talked to the startups themselves they would tell you they NEED to be in San Francisco or Cupertino or Mountain View, etc. just to get on the radar with investors. And though most venture capitalists would have denied that to be the case, it certainly seemed to play out that way. The Bay Area has been accounting for roughly 50% of all the venture capital funds raised in the US over the past four years and nearly all of that has gone to companies situated in just a handful of Bay Area cities… very few of which have been in the East Bay.

Interestingly enough, there was a pre-Tech Crunch event on 9/17 called StrictlyVC where a number of issues were raised in regards to the Bay Area’s Achilles heel… the soaring cost of living (and doing business). At one session, startup investor Chamath Palihapitiya stated a few things we simply hadn’t yet heard from the venture capital world that could mark a turning point. He said, “It’s fine to fail. But if you fail because you didn’t have the courage to move to Oakland and instead you burned 30% of your cash on Kind bars and exposed brick walls in the office, you’re a $%#*ing moron.”

“If you think about it, there’s way too much money… chasing few really great companies. The problem with that is you have a bunch of imposter companies get funded for a lot longer than traditionally the case. With 1/10th the capital, the mortality rate is higher, faster. The curves are sharper… That’s problematic. If you don’t have that churn, the few (breakout companies) that can really reach escape velocity are forced to figure it out sooner. So what do they do? They pay people more. They start to spend more on all these things that they think attract people… The cost of everything goes up. And you get this really vicious cycle where that top engineer can’t even afford to come here in the first place because he can’t afford one bedroom in a five bedroom place because it’s $2,000 a month.”

While Mr. P went on to attack a laundry list of startup excesses and even went so far as to point the blame, in part, on the commercial real estate industry. On that account, I would just point out to him that all of us are tied up in this cycle (albeit one driven by tech) that is ultimately about supply and demand and market forces greater than any one industry. There’s too much VC money chasing too few opportunities and that is no different than there have been too many companies chasing too little office space and too few renters chasing too little housing. All of these are the problems of an economy on fire. But I can’t agree more with his assessment of the challenges related to costs. If you have been following me for the past year I have been saying the biggest threat to the Bay Area economy has been the issue of skyrocketing costs. And to that end, the tech world has been slow to embrace the East Bay as the natural pressure valve for those costs… until now.

That is something huge to keep in mind… If VC was a factor in keeping the tech clusters on the west side of the Bay, this doesn’t appear to be the case anymore. For one of our stories of the week I chose the piece Oakland To Tech: Please Don’t Screw This Up Like Last Time that ran on the TechCrunch website last week as Disrupt SF took place.

Last year I spoke at the First Annual Bay Area Apartment Summit and I had made the statement that Oakland is the New Brooklyn. In the Q&A phase of that event I fielded a bunch of questions. One of them was from a gentleman who said, “I want to believe you. I should believe you and the numbers support what you are saying. But Oakland is Oakland. We thought it would happen in the last boom but it didn’t and I blame a lot of that on city government.”

My response then was that the pressures are too great for Oakland to screw it up and that we should at least give the new administration a chance. I spoke last Thursday at the Second Annual Bay Area Apartment Summit (CLICK HERE for a copy of my presentation). And no one is questioning the rise of the East Bay anymore. The Schaaf administration has turned out to be pretty darn pro-growth. And, yes, the numbers haven’t hurt either.

But the Uber deal… this isn’t just a big real estate deal. It’s a milestone and a major turning point. Get ready East Bay… We’re not going to recognize Downtown Oakland in a couple of years.

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 garrick.brown@cushwake.com.

garrick-brownGarrick 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.

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