Signs of a technology bubble in the San Francisco Bay Area are increasing.
This past January, Institutional Real Estate Americas published a timely piece called, “Unicorn hunters: Technology-driven property markets have outperformed in the current expansion.” The article provided a well-balanced review of tech markets’ current outperformance and did point toward rising risks in the market. In the article, author Loretta Clodfelter, editor of Institutional Real Estate Americas, noted:
“The City by the Bay has seen the biggest growth in high-tech software/services jobs from 2012 to 2014 — an increase of 42.7 percent, equating to some 16,976 new jobs and 55.1 percent of all new office jobs during the period, according to CBRE’s Tech Thirty report. The San Francisco office market also has had the greatest increase in rents, which were up 30.7 percent from mid-2013 to mid-2015.”
Later in March, Bloomberg noted, in a piece called “Tech Slowdown Seen in San Francisco’s Commercial-Property Market”:
“Office subleasing, an early indicator of past downturns, is at the highest level since 2010. The amount of available space from subleases in the city jumped to 1.9 million square feet (176,500 square meters) last month, a 46 percent increase from the end of the third quarter, according to a report from Cushman & Wakefield Inc. Twitter Inc., Intuit Inc., and Zenefits are among tech companies putting excess space on the market.”
The article goes on to point out:
“The largest share of space on the market is from companies that are contracting or consolidating, according to Cushman & Wakefield. As of the end of last year, about 55 percent was from the technology industry.”
Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the Haas School of Business at the University of California – Berkeley, summed up the situation very well in the article. He was quoted saying:
“We’re going to have a correction in the job market in San Francisco over the next several years. We had an economy that was growing based on the availability of capital rather than the fundamental performance of some of the companies.”
Another Bloomberg story provides additional support for concern regarding the health of the tech market. A video report titled, “This Could Be the End of the Tech Boom,” made the following points in May:
- Just one tech IPO has happened this year.
- The last lowest tech IPO year was 2008, when six went public; we could set a new record this year.
- There are more than 150 unicorns, which are start-ups valued at $1 billion or more, and a number of them would like to go public.
- The question is: How long can they afford to wait?
Clearly, there are some red flags in the market. As we all know, cycles tend to surprise us on duration on both the upside and downside. We may have more to run, but plenty of other cautionary examples in the market today make a good case for being more conservative going forward in tech-related real estate in the San Francisco Bay Area.
The views, statements and opinions expressed in this article are those of the author and are not necessarily those of Institutional Real Estate, Inc.
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John Hunt is conference program manager with Institutional Real Estate, Inc.
