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Summary:

San Francisco has become the destination of choice for consumer Internet and mobile startups. And thanks to liberal venture funding, the rents in SF are headed higher, which in turn is boosting their cost of doing business. Ironically — it is only just a start.

Average rents for creative tech space 2010

Average rents for creative tech space 2010You’re the head of a growing San Francisco startup looking to cut a sweet deal on a “creative” new office space to contain your ever-expanding cadre of devoted young employees and make your old incubator buddies jealous. Should be a cakewalk in a down market, right?

Err, not so much. While much of the office space available within the city’s traditional high-rise buildings are still experiencing elevated vacancy rates and lower leasing prices, hit the tech industry enclave of the SoMA neighborhood, and it’s a whole different scene.

In the first quarter of 2010, the average asking price for a traditional “brick and timber” loft space in SOMA hovered near the low $20’s per square foot. Now, the average price is moving between the mid-to-high $30’s, according to data from brokers who monitor the area. A few listings are even beginning to creep into the $40 dollar per-square-foot range. There are no signs of a slowdown anytime soon.

So what’s fueling the price increase? Partially, it’s newly funded startups moving to the city, existing tech firms expanding, and outside firms from Silicon Valley and beyond looking to add San Francisco offices.

But the biggest culprit is an inflexible supply of the preferred housing stock: rehabbed, industrial lofts in historic buildings (preferably with a roofdeck).

“They just aren’t building new pre-war, brick-and-timber buildings with exposed walls and concrete slab pillars,” said Blake Luger, a commercial broker who specializes in tech firms at Kidder Mathews. “Everyone wants these creative spaces. But demand is growing and the supply is not.”

While rents aren’t expected to mimic the frenzied heights of the ‘90s bubble–when asking prices reached as high as $80 per square foot — prices in the $40 to $50 per square foot range are not out of the question.

And at certain point, many companies will have to re-evaluate what they are prepared to sacrifice. Lugar tries, often unsuccessfully, to direct his clients toward areas like areas like Union Square, which may be close to public transportation but also creatively stifling throngs of tourists, and the Financial District, possibly the one area in the city where suits outnumber hoodies as work attire.

“Companies consider space to [be what makes] the culture, but people also make the culture,” he said. “If you save fifty or a hundred thousand dollars a year on rent, that’s money that can be used for signing bonuses or catered office parties.”

However, with the money flowing in from VCs, most startups just seem to be adding that additional rent to the cost of doing business.

  1. “Creative tech space” sounds like a niche that’s created specifically for the purpose of writing this report. Why not just report on general office rental instead?

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