5 Reasons to Suspect that the Tech Boom may be Ending and what it means to Commercial Real Estate

From Alexander Hamilton of Versant Law Group: A lot of the growth in real estate over the past few years has been fueled by the ongoing tech boom in both in the Bay Area and other parts of the country. According to one recent estimate, tech companies continue to drive the most leasing activity across the country—nearly 25% of all leases over 20,000 square feet in the past two years. Yet I get asked on a regular basis as to whether I think the tech boom is ending. Even though I continue to see a lot of tech leases, there are 5 reasons I think the tech boom may be ending. 1. National tech employment growth may be falling off. One estimate shows that growth in hiring in the tech sector has dropped by 50% from 2015. While growth in the tech sector continues to grow at twice the average of other private sector industries, the steep drop off from last year is troubling. 2. Increased Focus on Fundamentals. As tech grows up and investment homeruns fade from popular memory, investors are focusing more and more on business fundamentals, favoring companies with profitable track records, firm business plans and solid customer bases. As a result, fewer tech investments are occurring and the ones that do occur are smaller. 3. Venture capital activity in tech firms is slowing. Overall the number of investments made by VCs in tech companies has fallen by 40% from Q2 of 2015 and the total capital invested has dropped by 33% from $12B to $8B. According to PWC, investment in unicorns (companies valued $1B or more) during that same period dropped by only 8%, which means that more capital is flowing to large companies while start-ups struggle for financing. 4. Tech Moving to Less Expensive Markets. With the slowdown in investment in the tech industry, seed and early-stage companies are becoming more sensitive to the cost of real estate. The result is that they are moving into less expensive markets or submarkets. Within San Francisco alone, tech companies are foregoing Soma and instead moving more and more into the Union Square, Jackson Square, North Waterfront, mid-Market and Van Ness Corridor submarkets. Even well-funded, late-stage startups while continuing to grow their real estate footprints, are doing so at a less aggressive rate. 5. Growth in Co-Working Environments. Also as a result of tightening investment markets and uncertain futures, more and more seed and early state companies are foregoing for the time being permanent office space in favor of co-working environments. This not only reflects the fluid work environments and schedules of tech workers but the lack of confidence in investors and management regarding the short and long term futures of early stage start-ups. What does this mean for commercial real estate? A down turning tech market may be the impetus for a number of changes in the commercial real estate market. 1. Fewer leases to start ups. As investors and landlords become more concerned about the future of tech, we are seeing less leases being entered into with start-up tech companies. In addition, those leases that are being entered into with tech start-ups are on more aggressive terms and with larger security deposits. 2. More leases to Unicorns. With a slow-down in leases to early stage tech companies, more landlords are looking to lease to large tech companies with established credit. These tenants are correspondingly able to negotiate more favorable lease terms. 3. Credit concerns. With the tightening tech market, landlords are having credit concerns not only with early stage tech companies but also with maturing tech companies who may be experiencing limits on their ability to grow their business and may also be seeing increased competition from other maturing tech companies. As a result, landlords are taking a more critical eye to the future prospects for strength in tech performance. As a result, they are seeking greater credit enhancement both at the commencement of tech leases and as tech companies look to extend their leases. 4. Expansion of co-working companies. Finally, the decrease in leasing to start ups and early stage tech companies as well as the hedging of bets by investors, is resulting in a large number of start ups and early stage companies moving into co-working environments such as WeWork, Covo and Next Space. The result is that more companies are moving into the arena of establishing co-working environments as a way of meeting the growing demand for co-working space.

What To Do Next:

Given my background as a CPA with a national accounting firm, I always commence any representation with a strategy session in which I work with my client to identify and clarify their business goals. Once those are clearly understood, legal services can be focused to help them reach the most favorable outcome efficiently and in the lease amount of time. As the author of Miller & Starr California Real Estate Forms, the most often consulted real estate practice guide in the country, I make it a point to stay up to speed with the latest changes in the law, as well as make sure that my client's contracts clearly represent the intention of the parties. This saves time and thus money which I then pass on to my clients. If our firm is not the best resource for the client given the facts at hand, we maintain an extensive trusted network of other professionals to whom we make referrals. Our goal is always to look outside the box to provide the greatest value to our clients. Contact our office at 415.627.9145 orahamilton@versantlaw.com to schedule a strategy session.

C&W Marketbeat Report - A Bit More Detailed

This market report delivers more specific research regarding the SF office market, top deals, future deliveries, rate info, and more.

TRI Commercial's SF Market Report

Here is our latest market report filled with stats, transaction details, and more.

Use Your IRA to Purchase Investment Real Estate

The article here shows how people are using their IRAs to invest in real estate which adds diversity to the usual investment vehicles.

Diversification can make sense.

61% of New Office Deliveries Are Pre-Leased - And What's Left Won't Be An Option For Most Commercial Tenants

CBRE is reporting that a great majority of the new commercial deliveries are pre-leased which means what's left will need to be leased as occupancy dates approach.

Large tenants are typically the ones who have committed to these blocks of space and typically are full floor occupiers.

What this means is that most commercial leasing tenants aren't going to be able to lease these spaces because 1. they may not be able to lease a full floor or more 2. new construction lease rates aren't cheap and 3. not everyone wants to be in a downtown or similar location.

Just because you see cranes and buildings being built doesn't mean there's new inventory that will be an option for small and medium-sized companies.

For the report, please click here.

Chinese Outbound CRE Investment Way Up

BusinessWire has a report here of the spike in Chinese outbound commercial real estate investment.

Much of this is inbound to the United States.  The smaller investors who may not be included in these statistics will continue to acquire U.S. properties, boosting the pool of buyers.

The price per square foot in accordance to BART stations - please see this graphic

Thanks to the people who did the research to determine the cost per square foot for real estate proximate to BART stations.

Enjoy!

City coffers should be flush with revenues from property taxes

San Francisco just broke a record and you can thank all the residential and commercial property owners who have recently bought and sold which triggered a new tax basis.

See here: http://www.bizjournals.com/sanfrancisco/morning_call/2016/07/sf-property-assessment-taxes.html?ana=e_sfbt_rdup&s=newsletter&ed=2016-07-19&u=vg6D5JmGWYz237t8pJQfyu9S9ik&t=1468941996&j=74977152

Warning to commercial tenants: If The ADA Education and Reform Act of 2015 does not pass, "drive-by" lawsuits will only continue

One of my commercial clients, an insurance agent, informed me of a string of "drive-by" lawsuits his parent company had been dealing with nationally.

This bill will help avoid costly litigation and allow commercial tenants to make repairs (or seek repairs by their landlords) without money going to unscrupulous attorneys.

See here:http://www.narfocus.com/billdatabase/clientfiles/172/2/2696.pdf?om_rid=AAQwPS&om_mid=_BXhTApB9PiYlhL&om_ntype=BTNCommrcial

48 Property Global Portfolio Sale By Swedish Pension Fund - Is This A Sign?

It is begin reported here that a Swedish Pension Fund is selling their global portfolio of commercial properties which includes several assets in the Bay Area.

There are several reasons why people sell - they've reached their investment goals, the market is hot, or there are signs that we have hit the peak (or near it).

When something of this magnitude occurs, it leads many to believe that we're close to the top of the market as it wouldn't be prudent to sell early and leave a whole ton of money on the table.

SF Business Times: "Venture capital deal-making signals the party's over"

So I just read that the party is over.  Venture-backed firms are experiencing down rounds, layoffs, acquisitions, and more.  Well, don't tell that to all the venture-backed tech firms that I am currently working with who seem to be doing just fine and in need of space.

The article states that "Rory O'Driscoll, a partner at Scale Venture Partners in Foster City, likened the mood in the Bay Area's startup community to the moment the Titanic hit an iceberg.

"No one wanted to jump into lifeboats right away," O'Driscoll told the Wall Street Journal."

That sounds pretty foreboding!  Personally, I too have experienced the collapse on a small scale where two of my venture-backed firms who signed leases last year have already shut down locally or are about to do so.  There are grumblings that others may not be adding headcount as previously forecasted.  But the comparison to a sinking Titanic isn't a reality in my current circle, yet.

I suspect the slow down will continue but there are too many cutting edge companies being created each and every day that are going to succeed tremendously and reshape entire industries such as Airbnb, Square, and Uber.  As long as their growth and path to profitability are realistic, we should see a healthy commercial real estate market.

Now is the time for tenants to contact me to extend their leases or find new office space as securitizing a deal as things worsen will only get more costly.  Sure, there is the argument that rates may go down but unless there is a flood of office space in the 2-10,000 square foot range, pricing may not drop dramatically in the coming quarters.

Please ping me with questions about an early renewal, early relocation, or to discuss subleasing surplus space.

Ken Rosen: The Bay Area CRE Market Will Remain "Rosy" in 2016

Ken knows what he's doing so please read here.

Personally, I agree with his sentiments but am already seeing some shakeouts.  Two tech firms I represented last year may be giving back their space due to financial issues.

I don't expect a major bubble burst, just some companies who aren't profitable getting the axe while the others who show promise continuing to grow.

Enjoy!

Here's information on under water commercial properties. However, it's not what you think from the traditional, financial sense. Read on!

I look forward to completing a transaction in one of these properties!  It seems a bit unnerving and I wonder what the impacts to the environment are, nevertheless, it seems like this will happen somewhere  on the planet in my lifetime.

Enjoy the article here.