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As Rents Rise, Can Developers Continue To Attract Residents, Employers To San Francisco's SoMa?

An influx of tech jobs has flooded into San Francisco’s South of Market within the last few years. But much like the rest of San Francisco, SoMa is posting record-high rents and a lack of affordable housing. Amid rising office rents and housing prices, many residents and employers have started to look outside of San Francisco.

Allen Matkins partner Tony Natsis, Kilroy Realty Senior Vice President Mike Grisso, The John Buck Co. Principal Ben Kochalski, City of San Francisco Director of Economic and Workforce Development Todd Rufo and Cushman & Wakefield Research Director Robert Sammons

Developers, consultants and city officials discussed San Francisco’s housing and office challenges and what makes SoMa an ideal place for employers and residents during Bisnow’s recent Future of SoMa & Transbay event. The Central SoMa Plan will help accommodate more housing and jobs as the downtown area gets built up. But that still may not be enough.

Cushman & Wakefield Research Director Robert Sammons

Since January 2010, the region has gained 700,000 jobs, nearly the entire population of San Francisco, according to Cushman & Wakefield Research Director Robert Sammons. During that time, one housing unit was built per 6.3 people. Office users make up about 55% of the jobs, much higher than elsewhere around the country. Cushman & Wakefield is tracking office tenants currently in San Francisco that are occupying 6M SF and could move into one of the large blocks of space opening up with the new construction. Of these tenants, 60% are some kind of tech firm. Fintech also is huge and continues to grow.

Rents continue to climb and average asking rents are about $75/SF. During the dot-com boom in 2000 to 2001, average asking rents adjusted for inflation were a little over $100/SF. A little over 3M SF of new office is expected to deliver this year, the most since 1986 when Prop M passed. Another 1.5M SF is expected over the next two to three years.  

The John Buck Co. Principal Ben Kochalski

The John Buck Co. Principal Ben Kochalski said that Park Tower is starting to be visible to passers-by, tenants are entering into serious negotiations for space. Park Tower has had three times as much interest as last year. He said the market continues to be on-demand with prospective tenants more likely to sign up for new space closer to the building’s completion.

The Central SoMa subway, which will provide access from the Bay View district to Chinatown and connect to major MUNI metro lines, will have a significant impact on this part of San Francisco, according to City of San Francisco Director of Economic and Workforce Development Todd Rufo. The Central SoMA corridor, which runs from Second to Sixth streets down Market Street, will create space for 45,000 jobs and 7,800 housing units. The city also has an aggressive program to preserve industrial business so there is plenty of light industrial.

Essex Property Trust Chief Information Officer and Executive Vice President John Eudy and City and County of San Francisco Planning Director John Rahaim

Central SoMa’s master plan is expected to be adopted later this year and will provide space for companies that want to be in the city, but do not want to be in a downtown high-rise, according to City and County of San Francisco Planning Director John Rahaim. Central SoMa will have large floor plates and a different type of zoning to capture a type of urban grit.

He said Kilroy Realty’s Flower Mart is a perfect example of how this vision will play out. The mixed-use Flower Mart will be at the corner of Sixth and Brannan streets and offer an expansive market hall to maintain the current flower mart. Creative office space will be built above. It is expected to open in mid- or late 2021.

Kilory Realty Senior Vice President Mike Grisso, Arup Group Leader Aidan Hughes and Allen Matkins Partner Tony Natsis

“What excites me about Central SoMa and Transbay … is the bikes, the industrial space, the housing, the office and retail,” Kilroy Realty Senior Vice President Mike Grisso said. “What we are doing in San Francisco is the right approach.”

The city has a long way to go, speakers said. Companies are being priced out of San Francisco and housing is becoming a real challenge, according to Grisso. San Francisco is starting to lose employers to Texas and elsewhere.

City of San Francisco Director of Economic and Workforce Development Todd Rufo

When middle-income jobs leave San Francisco, they are not often replaced, Rufo said. When space is vacated, tech often comes in, but the city needs to try to maintain a broader base of jobs. San Francisco’s mayor has set out to build 30,000 units of affordable housing by 2020, but other cities are not stepping up and building more housing. Rufo said there needs to be a regional effort to create better transportation and housing. Over the past five decades, less housing is being produced each decade, according to Rahaim.

Polaris Pacific partner Paul Zeger said his firm can rarely find a one-bedroom condo that sells for under $1M and a homebuyer has to have an income of at least $400K and pay $5K to $6K/month in mortgage. The cost of building in San Francisco is so high that many developers will not consider a project if the gross sales price is not at least $1,400/SF.

Highland Realty Corp. Principal Jeff Eliason, Polaris Pacific partner Paul Zeger and Panoramic Interests Chief Financial Officer JP Walsh

Construction costs and a lack of labor are among the top drivers making it difficult to build housing. Yields and returns are low, making it less attractive for capital markets to finance.

Build Inc. Principal Michael Yarne said his company uses a mix of construction loan debt, which makes up more than half, along with mezzanine equity and common equity. Build’s 156-unit project in Western SoMa at 1532 Harrison St. was very difficult to finance.

“If I’m capital, why would I go to San Francisco, which has this crazy reputation of uncertainty and delay, and accept a very small return on cost?” Yarne said.

Seal Rock Investments Principal Brian Veit, Build Inc. Principal Michael Yarne and Panoramic Interests Chief Financial Officer JP Walsh

A lack of subcontractors has made construction costs skyrocket and subtrades are charging three times as much for the same work they did three years ago. Because of a lack of affordable housing, subcontractors are not moving here or are having to live far away and commute. They are instead going to places like Seattle where housing is more affordable, Yarne said.

Panoramic Interests, which focuses on workforce and student housing, is working on a project next at 333 12th St. that will provide 200 micro-units. Panoramic Interests Chief Financial Officer JP Walsh expects the San Francisco Art Institute to take half the property as student housing. Along with Build Inc.'s project and roughly 600 students coming into that neighborhood, he expects that neighborhood to come to life.