San Francisco Office Market at Dot-Com Era Peak, Tech Unicorns a Concern Now

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According to a new research report from CBRE Group, the San Francisco Bay area's surging technology industry fueled robust office-leasing activity and soaring rents in 2015 reminiscent of the dot-com boom. Yet, with concerns swirling about a potential correction in tech valuations, certain Bay Area submarkets such as San Francisco carry more exposure to "unicorn" tenants than others.

CBRE examined nearly 6,400 San Francisco Bay Area office locations occupied by more than 5,400 firms in its 2016 Techbook research report. The report outlines the extent of the tech industry's domination of the market, where 172 million square feet - or 36 percent of all office stock - is occupied by tech firms. In the first three quarters of 2015, tech firms accounted for 60 percent of all office-leasing activity in the Bay Area.

That strong demand pushed rents near dot-com peaks and kept vacancies tight across the Bay Area. San Francisco's office market has benefited the most, as the average asking rent in the city increased by 129 percent since early 2009 to $70 per square foot in last year's third quarter. Comparatively, in Silicon Valley average rents climbed 76 percent to $51 per square foot in that span and 40 percent in Oakland/East Bay to $33.

"Although there is caution in the air about frothy tech valuations and the continued availability of venture-capital funding, office real estate in the Bay Area remains a strong asset," said Colin Yasukochi, CBRE's director of research and analysis in the Bay Area. "The current economic cycle is regularly compared with the dot-com era because of the technology sector's overwhelming growth profile. However, the Bay Area commercial real estate market has greater support and lasting power this time around and the conditions that led to an extreme spike in 2000 are not expected to surface."

While the Bay Area as a whole is on solid footing, there are signs that certain segments of the tech market are at risk of retrenchment. Most concerns focus on unicorns, which are fast-growing tech firms valued at $1 billion or more and in their later stages of attracting private financing before launching initial public offerings on the stock markets.  Late-stage venture capital financing for Bay Area tech firms in 2015 reached the dot-com high of more than $6 billion.

This raises a concern for the Bay Area office market due to the high concentration of unicorns there. CBRE's research found that, of 144 unicorn firms tracked nationally by venture-capital database CB Insights, 60 are based in or have a presence in the Bay Area, the largest concentration in the U.S.

Specifically, San Francisco has the area's largest stable of unicorns, and its 40 unicorns account for 16 percent of its tech-occupied space and 4.9 percent of its overall office occupancy, according to the CBRE report. In Silicon Valley, unicorns claim just 0.7 percent of occupied office space overall.

Further underscoring San Francisco's reliance on young tech firms, CBRE research found that those founded within the past 10 years account for nearly as much space in San Francisco (10.4 million square feet) as do tech firms older than 10 years (12 million square feet). In comparison, young tech firms in Silicon Valley occupy less than one-tenth the amount of space (10.5 million square feet) that firms older than 10 years do (114.5 million square feet). Across the Bay Area, more than 2,400 tech firms were founded during the past 10 years and occupy 15 percent of the market's total tech-occupied inventory.

The report also found Silicon Valley (73 percent) and San Francisco (13 percent) accounted for 86 percent of all tech occupancy in the Bay Area, which is dominated by hardware and software firms that comprise 65 percent or 112 million sq. ft.