How VC Funds and Investment Effect Commercial Real Estate
Jul 18, 2012
San Francisco to Mountain View has seen an economic boom that has resulted in lower office vacancies and higher prices over the last 18 months. Overall office vacancies have dropped in core areas by as much as 10 points, and prices in these same areas have raised as much as 40 percent. This kind of growth has not been seen in other regions of the Bay Area - the East Bay office market continues to be flat, and Marin County has actually seen an increase in office vacancy rates in some markets. The economic growth seen from San Francisco to Mountain View is due to the success of technology startup firms backed by VC money.
As a result of this tech boom, speculative office buyers and developers are stepping up and buying buildings at prices not seen since the dot-com boom. We are also seeing developers stepping up and considering projects from the ground up. Buyers today have bought into the fact that San Francisco prices are under valued and will be continue to grow; meaning that now is the time to buy and build.
VC's are betting heavy on social media, online gaming and mobile application firms. However, we may soon be seeing a drying up of funds, which could have a serious impact in putting the brakes on recent growth. VC's create funds to invest in technology companies and ideally look to invest in firms with a payback to investors within a three-year period. With this boom now reaching over two years, the time frame for payback is coming soon - meaning that these funds will no longer be in an investment mode but rather in a delivery mode to meet their financial objectives for their investors.
With the failed upside growth hype regarding the Facebook IPO and what has happened to Zenga's stock value since its IPO launch it makes sense that investors are seeing things negatively when looking into their investment crystal ball. Obviously if these new and/or future tech giants turns in strong revenue numbers then all worries will be over, at least for a little while.
Looking at rents since 1984, there is a longer period of flat rents following a spike as opposed to longer periods of continued increases in prices. Having been through this up and down cycle before in my 30 years in commercial real estate I know one thing for certain: when San Francisco office prices skyrocket it will make an adjustment downward.
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Written by: Hans Hansson
Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 27 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email firstname.lastname@example.org or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.