Is San Francisco a Tech Bubble or an Economic Miracle for Real Estate Investment?


With all of the bad economic news floating through the media and the internet, one region has stood out as beacon of hope and inspiration. The San Francisco Bay Area continues to see job growth and economic activity unlike any other region in the country. As an investor, operator and developer of commercial real estate, our analysis is greatly concerned with job growth for it is a driver of office space users and industrial space demand. Our firm has spent a lot of time exploring the economic drivers of the SF Bay Area and have tried to understand whether it is being driven by a tech bubble or a real economic miracle unlike any other region in the United States.

It is clear that technology sector jobs are a driver. In the city alone, the information sector, including Internet stars like Twitter, Zynga and Dropbox, is 20 percent bigger since 2008; information technology services expanded headcount by 13 percent; and chemical — mostly biotechnology — expanded employment by more than 8 percent, said Ted Egan, chief economist with the San Francisco city controller’s office. The commercial brokerage firm Jones Lang LaSalle found that of 4.6 million square feet of office space leased in San Francisco in the first six months 2011, 1.6 million was taken by technology companies. However, our research indicates there is much more going on in the San Francisco commercial real estate market than a repeat of the tech bubble of early last decade.

From a real estate perspective, the second quarter of 2011 proved to be one of the most active quarters for the San Francisco office market in over four years, with 677,286 SF of positive net absorption. As office properties regain value, rising tenant demand and transaction activity continue to influence decreasing vacancy and availability. The office recovery continues to gain traction as rental rate acceleration and absorption reach pre-Great Recession levels. As a result of growing tenant demand and market activity, available space dropped to the lowest amount witnessed since third quarter 2008, currently at 12.6 MSF. Available sublease space is becoming harder to find, as early to mid-stage tech companies target value opportunities. Vacant space is at the lowest level in over two years, currently standing at 10.4 MSF.

As an investor, our focus has been to dive into these numbers and appreciate which sectors of the economy are drivers. Clearly tech is an important driver but it is not the most important driver. Rather, San Francisco hospitals inject $15.3 billion a year into the economy, account for nearly 99,000 jobs or about 18 percent of the city’s workforce, making the industry one of the healthiest in the city’s economy, according to a report released today. Tourism and hospitality is considered the city’s largest industry for the number of direct and indirect jobs they generate, but a strong case can be made that more spending comes from San Francisco’s vigorous medical industry. Not only do hospitals spend money on wages, benefits and supplies, the employees and companies they pay also support the local economy.

“The growth in medicine, biotech and teaching hospitals has been below the radar to most people. Maybe that’s because for many decades we’ve said tourism is our No. 1 industry,” said Jim Lazarus, vice president of the San Francisco Chamber of Commerce. ”Clearly tourism is an important part of the economy that brings in new dollars every day, but it’s clear that our growth in the past decade has been in medicine.” On top of that are the construction jobs – $4.9 billion over four years,” he said, referring to a construction boom resulting from the demand for newer and larger medical centers and state mandates requiring earthquake retrofitting of hospitals. “And health care jobs on average pay almost 22 percent higher than other jobs in the city.”

Unlike other sectors of the economy, many jobs in health care can’t be usurped by outsourcing or technology.
“These jobs aren’t going anywhere,” said Steven Rousso, principal with HFS Consultants, an Oakland financial consulting firm for clinics and hospitals. “They’re here to stay and are only going to grow as health care becomes a larger percent of” gross domestic product.

Clearly, San Francisco is one the hardest markets to penetrate in terms of real estate investment. However, we believe that there are quality opportunities for both development and acquisition and continue to actively pursue those opportunities.

Kenzie Gallagher