As surging demand from technology companies propels rents skyward and vacancy rates lower in the South of Market Area, the neighborhood is reaching its limits and prospective tenants are looking to the once-uncool Financial District.
And Financial District property owners — who suddenly can’t attract rental rates as high as those in SoMa — have taken note of the type of office space popular among tech firms.
So they are ripping out their carpets, ceiling tiles, cubicles and private offices and replacing them with sealed concrete floors, high ceilings with exposed air ducts and lots of open space.
“A lot of these new workers don’t want to go into an office their dad used to work in — they want a cool space,” said Charlie Withers, vice president of The CAC Group, a brokerage firm that studies commercial real estate trends.
While some buildings are being renovated in select suites or floors, others, like 115 Sansome St., are getting a full makeover. John Winther, of Harvest Properties, said his company saw SoMa’s growth and decided that it could offer something similar in the former Standard Oil headquarters, built in 1912.
Harvest Properties removed ceiling tiles to expose support beams and utility pipes, took out cubicles to provide open meeting areas and restored the building’s original copper windows.
Winther sees the project as an investment in the future of office space.
Technology businesses notoriously drove the rental market to SoMa, and more recently the up-and-coming mid-Market area. But now those businesses are also setting the trend for office style, industry experts say. Other creative-minded companies, as well as traditional businesses, also are seeking offices with an open layout and minimalist feel.
“This goes beyond a fad,” Winther said. “This is an important transition — a revolution.”
The Financial District’s copycat moves come at a time when the area known for its 9-to-5 crowd now has a higher commercial vacancy rate than SoMa.
Vacancy rates in the fourth quarter of 2011 were 11.8 percent in the Central Business District and just 3.4 percent in SoMa, according to a report by Jones Lang LaSalle.
The rock-bottom vacancy rates in SoMa have led some industry experts to question whether that neighborhood is on the brink of another bubble akin to that from the dot-com era, when the Internet market grew at an unsustainably rapid rate and ultimately burst in the early 2000s.
But there are many differences between then and now. Chief among them is the financial health of the companies in question. While much office growth a decade ago was driven by smaller companies still searching for business models, today’s growth is being driven by large companies such as Salesforce.com, LinkedIn and Zynga — companies with publicly traded stocks and healthy revenue streams.
Some experts, including Withers, say the tech industry’s office model is another sign of diversity that the dot-com industry lacked.
“For a lot of reasons, this isn’t a bubble that’s popping anytime soon,” Withers said. “I think this has a lot more legs.”
SoMa eclipsed the Central Business District as an office destination in 2011. Rents are now higher there while vacancy rates are lower.
Source: The CAC Group