Tech Bubble 2.0

Ah, but here we go again

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OPINION We all remember the first dot-com bubble, right? Web technology start-ups flocked to San Francisco in the late 1990s. Thousands of would-be entrepreneurs and techies filled up the city. Gentrification of Central City neighborhoods accelerated sharply. Apartment rents jumped, followed by the condo boom. Demand for commercial office space, especially South of Market, quickly grew red-hot. Rents zoomed, and office developers rushed dozens of proposed new projects forward.

The leaders of Mayor Willie Brown's gutless Planning Department rubber-stamped all they could, and decried the annual limit imposed on their approvals by the 1986 community-activist-sponsored Proposition M ballot measure.

The activists and the mayor put two competing measures on the November 2000 ballot in response. Both lost, but the progressive slate for the Board of Supervisors swept that election, defeating most of the mayor's candidates.

And then Tech Bubble 1.0 popped. The peak year was 2000. The big dot-com bust, 9/11, and finally the Great Recession all followed.

The city's office market crashed. Some new office buildings were foreclosed by their lenders. Many approved office developments went unbuilt. Overall office market vacancies approached 20 percent by 2010.

Ah, but here we go again — Tech Bubble 2.0! A new wave of recent technology industry start-ups — like Twitter and Yelp — are joining the growing survivors of Bubble Number 1 — like Salesforce. And San Francisco has become a premiere national media venue for the tech industry.

Thousands of would-be entrepreneurs and techies are again filling up the city. Apartment rents are going through the roof. Gentrification of Central City neighborhoods is accelerating even faster. Demand for commercial office space, still in SoMa, is red-hot again.

But by 2011 so much vacant space was on the market, and so many approved buildings were waiting for anchor tenants to start construction, that there has been room for them all so far. Several new buildings got underway. Mayor Ed Lee strategically took advantage of this market boom to target economic expansion to the Central Market District, the last disinvested zone of San Francisco's Downtown.

Even today though, city office vacancies still exceed 5 percent. And according to the most recent Planning Department report, more than a dozen already-approved new buildings, totaling more than 4.5 million square feet, are waiting to start construction in the Transbay Transit District, South of Market, and Mission Bay. Another 5 million feet of office space is proposed for more than a dozen more pipeline projects for those areas. Plus another 2.5 million feet is planned for projects on Port property — including the San Francisco Giant's huge project — that are not even on the Planning Department's list yet!

How does this total of 12 million square feet of pending new San Francisco office buildings compare to historic demand? Going back to 1986, the amount of new office space actually built — true long-term market demand through the boom/bust business cycles — averages out to about only 750,000 square feet a year. The city's old-school corporate headquarters dramatically downsized or even moved out of San Francisco — like Chevron and Bank of America — and that's still ongoing. The new tech industry is mostly replacing them. So these 30+ identifiable current projects would provide a 16-year supply of office space at historic rates.

But even in the face of this evident market glut of future office buildings, the usual civic development hypsters are once again muttering about gutting Proposition M, and radically upzoning Soma for even greater office expansion. Is that who City Hall will listen to this time too?

Bubble? What Bubble? [Pop!]

John Elberling is executive director of the Tenants and Owners Development Corporation.

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