San Francisco’s Record Tech Demand Reaches Biggest Bank Tower

Jun 18, 2014 12:01 am ET

June 18 (Bloomberg) -- An iconic San Francisco office property in the heart of the financial district is poised for a makeover as surging technology firms squeezed out of the popular South of Market area migrate to other neighborhoods.

The complex at 555 California St., once Bank of America Corp.’s world headquarters and the city’s biggest office building, has about 200,000 square feet (18,600 square meters) available for the first time since its 1969 opening, said Bill Cumbelich, the listing broker at CBRE Group Inc. New York-based Vornado Realty Trust has hired an architect for a revamp of the property and is seeking more technology tenants following leases with Microsoft Corp. and Supercell Oy.

“We’re introducing the location to tech and entrepreneurs who never thought of working here,” Cumbelich said as he showed off “Clash of Clans” game maker Supercell’s penthouse office on the 52nd floor, above where Goldman Sachs Group Inc., KKR & Co. and Morgan Stanley lease space. “Every building needs a tech strategy.”

San Francisco, the best-performing U.S. office market, has absorbed hundreds of software, mobile-application and data- storage tenants since 2010, with many clustering in the converted warehouses and brick buildings of South of Market, or SOMA. That’s forced newer and expanding firms to go where space is more plentiful. Towers under development just outside SOMA have attracted some of the spillover, heightening the challenges for landlords with vacancies farther from the technology hub.

Record Occupancy

Citywide, technology firms led four years of record leasing that pushed San Francisco’s office occupancy to an all-time high of 70 million square feet in the first quarter, according to CBRE. SOMA’s 5 percent vacancy rate and 844,000 square feet of available space compared with 7.4 percent and 3.1 million square feet in the financial district, about 10 blocks to the north.

Online retailer Stitch Fix Inc. and Credit Karma Inc., a credit-tracking service, both leased space last month in Union Square, the city’s marquee shopping district.

Technology demand is so fierce that medical-device maker Invuity Inc. lost out on potential office leases four times in the past two years to software and social-media firms willing to pay more or complete deals with fewer contingencies, Chief Executive Officer Philip Sawyer said. Job growth and venture funding of startups has depleted the supply of coveted workspaces with horizontal layouts, high ceilings and large, open floors, he said in a telephone interview.

“Our competition was well-funded,” Sawyer said. “You have to move quickly because the environment is so hot.”

Potrero Hill

Invuity finally found offices in Potrero Hill, south of SOMA, in a building that’s also home to First Look Media Inc., a news organization backed by EBay Inc. founder Pierre Omidyar. Invuity last month leased 38,000 square feet, triple its former space in SOMA, according to Sawyer.

San Francisco’s prime office rents jumped 81 percent since 2011, the biggest advance of any U.S. market and almost four times the 18 percent gain for second-place Bellevue, Washington, another technology-driven city, according to a report by brokerage Jones Lang LaSalle Inc.

Technology firms took occupancy of 1.62 million square feet of San Francisco offices last year, while all other industries combined gave back a net 200,000 square feet, CBRE data show.

Recent deals by Salesforce.com Inc. and LinkedIn Corp. in new projects close to SOMA suggest an uphill struggle for landlords pitching financial district spaces to technology companies, according to Jed Reagan, an analyst at Newport Beach, California-based research firm Green Street Advisors Inc.

Salesforce Tower

The burgeoning districts promise more “energy and buzz” and proximity to startups than the north financial district, Reagan said.

“Companies pushing the market want to be near like-minded companies,” he said.

Salesforce, the biggest maker of customer-service software, agreed in April to occupy more than half of Boston Properties Inc.’s planned 1,070-foot (326-meter) skyscraper, slated to be the city’s tallest upon completion in 2017.

The building, which will be named for San Francisco-based Salesforce, is near Jay Paul Co.’s office, hotel and luxury- residential project in the Transbay area, and Tishman Speyer Properties LP’s high-rise under construction in the south financial district. Mountain View, California-based LinkedIn agreed to fully lease the 26-story property.

In the north financial district, Vornado hired San Francisco-based architect Charles Bloszies, designer of a low- rise annex to Boston Properties’ tower at 680 Folsom St., to assist with upgrades at 555 California St.

‘Fresh Look’

“We’re taking a fresh look at this integrated 1.8 million- square-foot complex, including the outdoor and common spaces, to further enhance the overall tenant experience,” David Greenbaum, president of Vornado’s New York division, who is overseeing the project, said in an e-mail.

Creating a subterranean atrium and offices in a cube-shaped bank branch attached to the high-rise, and updating the building at the complex’s 315 Montgomery St., Bank of America’s headquarters before the tower was completed, are among possible renovations, Cumbelich of CBRE said during the tour of the property.

The dark-granite skyscraper at 555 California St. was featured in the 1974 disaster movie “The Towering Inferno.” At 779 feet, it is second only to the 853-foot Transamerica Pyramid as the city’s tallest building. By square feet, it is the largest.

Vornado’s tower is 97 percent occupied and its average rents of $75 a square foot rank second among San Francisco’s premium addresses, behind Boston Properties’ Four Embarcadero Center, according to Jones Lang LaSalle.

Original Brick

Older structures in the city’s traditional financial district have their charms, said Greg Flynn, president of San Francisco-based Flynn Properties. At 225 Bush St., the 1920s-era former Standard Oil Co. headquarters, Flynn’s company removed plaster walls, desk cubicles and ceiling tiles to reveal original brick and moldings similar to SOMA warehouse textures.

The redesign compelled Lithium Technologies Inc., Groupon Inc. and Zillow Inc. to sign leases in the past two years, helping boost occupancy in the 22-story tower to 99 percent from 68 percent, Flynn said. His company last month sold a 95 percent stake in the property to Shenzhen, China-based Genzon Property Group Co. Ltd. in a deal that valued the building at $350 million.

A block from Vornado’s tower, BrightRoll Inc. took two more floors in a Sansome Street high-rise where the online video services firm has leased space since 2011, according to Chief Financial Officer Ron Will. The offices are similar to any found in SOMA, while employees enjoy the financial district’s added conveniences, he said.

“You don’t get the high ceilings but you have completely open floor plans and collaborative workspaces, a density of restaurants and bars, and everything from Walgreen to gyms,” Will said. “We find the combination unbeatable.”