Landlords are trying not to rent to startups in San Francisco

https://42floors.com/blog/cre/landlords-are-trying-not-to-rent-startups

by jtbed • 11 years ago

310 290 11 years ago

rdl4• 11 years ago

Obvious arbitrage possibility is obvious, and being exploited by new companies (WeWork for $10b valuation) themselves -- if you're better at evaluating startups than big dumb landlords, you can profit here. And there isn't a shortage of capital to play this game.

fredkbloggs9• 11 years ago

If you're skilled at evaluating startups and have access to capital, owning real estate is a waste of time. This isn't an arbitrage opportunity. At best it's just borrowing short to lend long: the liabilities of the spot lease firms are in long-term leases and debt owed against owned real estate; the assets are short-term and demand leases on that property. This is no different from what gets overextended banks in big trouble when a bust occurs. In fact, we can even go a little farther: the banks that think they're the best at managing subprime credit risk (i.e., have the most underwriting skill) tend to take the biggest hit, because that skill is almost never real.

jmonegro• 11 years ago

WeWork might not be in the best position if most of their clients are venture-backed startups and they all go away within a few years.

rdl4• 11 years ago

Worst case, they go out of business if all the other startups go out of business.

It's leverage. When you have ~unbounded upside and capped downside, lever the fuck up. (And yes, this is how you get ants.)

nostromo• 11 years ago

WeWork is selling risk reduction for cash.

Should there be a downturn in tech, WeWork will be left holding the bag.

ChrisBland• 11 years ago

I'm working out of WeWork (Chicago office) and I think the SF WeWork is much different from most of their other locations. While there are a few venture backed startups here, most of the companies tend to be small businesses or single person companies that were previously at places like Regis or working out of Starbucks. For example some companies here: [model agency, recruiting agency, marketing firms, lawyers, accountants, payroll servicing company, a sunglass maker, stock traders] So while a downturn in Tech would hurt them in some of their locations, at the others I don't think the pain would be as bad. We were hoping there would be more tech companies here and were surprised at the number of non-tech firms. FWIW we really enjoy it and have grown now to our third office as we add people. Thats the real value here, month to month leases so we can scale up or down as our team evolves.

nandemo• 11 years ago

Landlords aren't dumb. Their payoff is pretty much binary: ($rent, 0). It doesn't matter how well a startup does, the landlord will get at most $rent.

If anything its the VCs who are dumb: why are they not investing in startups in Midwest US, or (say) Paris, Sao Paulo, Tokyo, etc?

fredkbloggs9• 11 years ago

This is a great analysis and the argument makes perfect sense in every respect. The only thing I find dubious is the idea that the bust is 2-4 years out. I think if you polled most SF commercial landlords, they would tell you that they expect most of their startup tenants to start having difficulty paying the rent in no more than 18 months. It would be interesting to see some actual data on this. After all, there's not much benefit to demanding 5-year leases if you think that (a) prices are going to keep going up for 3 or 4 more years, and (b) your tenants are mostly going to be solvent for at least that long. If the landlords really believed the bust were 3 or 4 years out, given the sub-sub-sublease problem, they'd take startups on 1-year terms at a MUCH higher rate than established tenants who could negotiate modest discounts on longer-term leases. The evidence presented suggests rather strongly that most landlords don't expect these startups to be in business in 2 years, and I agree.

pavel_lishin• 11 years ago

I think that horizon was meant to be in general, not on a per-startup basis. If any given start up fails in 12 months (expected), the space can be sub-leased to someone else - but they expect this scenario to only be the case for another few years.

fredkbloggs9• 11 years ago

Yeah but if they're really remembering 2000, they know that's not so. There's always going to be some nonzero attrition rate among startups, but once a bust is under way the door slams shut on all of them at once. I'm saying I think (and think that landlords also think) that the door is going to slam shut in 12-18 months (maybe even less), not 36 or 48.

ChuckMcM• 11 years ago

Agreed, many landlords seem to feel like the trouble is a mere few months away, although often any attempt at getting them to discuss how they arrived at that conclusion gets something like "I just know it."

So one wonders about the whole "wisdom of the crowds" or "herd" in this case, and whether or not they can sense something that isn't showing up in other indicators. I've been looking but other than the extensively covered late stage valuation madness I've not found good correlation for this feeling.

nostrademons4• 11 years ago

A lot of this may come from the belief that the economy is only being propped up by the easy money policies of the Fed, and that the Fed is going to start tightening rapidly in the fall. There's a sense that once the tightening starts, everyone will run for the exits at once, and we'll have another 2008 situation but worse.

_delirium8• 11 years ago

The strong real-estate market in general makes it a bit easier to act on these kinds of hunches, even if they're somewhat flaky. It's probably the case that a portfolio of big companies and clients in "conventional" industries poses less risk over the next 5 years than a portfolio of startup clients does, regardless of your exact estimates of the probability/timing of a potential crash in the startup market. With rental rates what they are, you can still make a ton of $$$ by renting to those other clients. So why not take the lower-risk clients, even if it leaves a few bucks on the table in rent? Once you're making really healthy margins, attention often turns towards thinking about how to maintain them and avoid big risks to those margins: you're a lot more worried about the possibility of everything going south next year, than about juicing the margins another 10-20%.

lkrubner2• 11 years ago

As James Surowiecki makes clear in his book "The Wisdom Of Crowds", the wisdom is only apparent in situations where the people are not able to talk to each other. But real estate agents are able to talk to each other.

In Surowiecki's telling, if you get a room full of people to write down a guess about how many jelly beans are in a jar, the average of all the guesses will be surprisingly accurate. But if the people are allowed to yell the answers aloud, the first person who yells a guess "anchors" the guesses, and so if that first guess is radically wrong, a substantial bias is introduced into the overall distribution of guesses.

Real estate agents in a small geographic area, such as one city, often talk to each other, and therefore they generate a conventional wisdom, but each of their opinions influences everyone else's opinion. So you can get a herd action that is greatly at odds with reality.

rdl4• 11 years ago

Everyone I've been talking with seems to say "less than 24 months".

recursive• 11 years ago

Most startups fail pretty quickly. It seems reasonable to me.

ExploitsforFun• 11 years ago

I have talked to people who are in property management companies who are worried about (possible) rising interest rates are going to do to their profitability. It may not be a concern in SV but elsewhere very much so.

brudgers2• 11 years ago

The REIT's that own Class A space are conservative. This reflects the investment goals of the institutional investors whose money they hold. Real-estate time horizons are long term in order to span across market cycles and because of the underlying nature of the asset. Real property really is different.

jakejake• 11 years ago

It doesn't really take a lot of intuition to know that the vast majority of startups are going to fizzle. Heck, "fail fast" is a mantra of the startup scene. Landlords just "know it" because they've already gone through it.

I think that the shared office spaces are really a wonderful solution so that young companies can have a great space without the long-term commitment. Ironically when we visited one (in Chicago) there were quite a few corporate "outposts" there with large companies like IBM.

novaleaf• 11 years ago

Based on the title, I expected this to be an article ranting about how someone thought their startup was being discriminated against.

Surprised that was, dare I say, "fair and balanced".

keithpeter• 11 years ago

The company that produced the post needs to understand the actual reasoning behind the local market for their business to be successful so no room for ranting I'd imagine.

What interested me was the way that in this discussion, each of the separate reasons for the landlords being reluctant to rent to start-ups has been discussed separately - analysis - where what the landlords are doing is making a synthesis.

ww5202• 11 years ago

It's not that the bust is coming soon. Startups are notoriously bad tenants as a class, whose life cycle is too short. Signing long lease with them just doesn't make sense. By definition a startup is an experiment to build products and a business in a short amount of time, with one to two years of funding in most cases. 9 out of 10 these experiments fail, so 9 out 10 startup tenants will move out after a short time. Commercial landlords want long term tenants, not people going out of business in one or two years.

Commercial lease is really only applied to companies that can stay in business. A long lease is often not enforceable. The incorporated company simply declares bankruptcy and it's hard to collect the money on the full term of the lease. I remember in the Dot Com bust days some failing startups simply stopped paying rents but stayed on, to stretch that last dollar or to burn out that security deposit.

superuser2• 11 years ago

Even if it doesn't fail and turns into a unicorn, its space needs will rapidly increase and it will still want to move on to bigger and better offices.

The entire point of a startup is to not stay its current size - either it will grow wildly or disappear altogether.

If you can comfortably occupy the same amount of space for 2+ years, you're not a startup, you're a small business.

developer1• 11 years ago

I wish you'd talk to the owners of a company I worked for. After 4 years in business, they continued to interview people for positions at a "startup", requiring candidates to agree to stay late or work on weekends to make the business succeed.

4 years in, no profit. After 5 years, they became "profitable before marketing costs", which was the largest business expense (in the millions).

Huh. I should dig and find out if they still call themselves a startup from 2009.

kijin• 11 years ago

According to the article, landlords expect economic cycles to last 7-10 years, and the last bust was in late 2008. So the next bust can be expected to occur somewhere between late 2015 and late 2018.

It's already close to late 2015, so the halfpoint of the predicted period is only 18-21 months away. That fits your observation that landlords expect the bust to be less than 18 months away.

jane_is_here• 11 years ago

A relative of mine made the mistake of renting to a start up. Rent has not been paid for several months. Legal proceedings have started. ( This is in a country where evicting tenants is notoriously difficult. )

adebtlawyer• 11 years ago

What country is that? Sure isn't the U.S.

comrade1• 11 years ago

Wow. I remember this is exactly what happened in 2001 and 2007. Maybe things are different this time.

mooreds13• 11 years ago

Large landlords with experience are probably a better group to bet on (in terms of understanding long term economic trends) than startups.

Just like the bond market is a better indicator of economic growth than the stock market. More money, more professionals, longer memories, not as much optimism.

Edit: future economic growth expectations, rather.

meatysnapper2• 11 years ago

As much as I'd like the US to crash to reality a bit so we can get our house together... a Chinese slowdown + European clusterfuck makes the US the best place to invest, still. That gives this boom a slightly longer lease on life.

mooreds13• 11 years ago

Or, consider starting a company outside of San Francisco. Not just outside of SoMA, actually outside of San Francisco. (I know, I know, blasphemy.)

Eventually the price of real estate and labor will be so high that the relative disadvantages of other locations will not matter.

meatysnapper2• 11 years ago

I think the advantage of a massive skilled labor pool and investors within walking distance is a nearly insurmountable advantage.

For a small company, I'd say the time/cost of hiring a few good engineers is way more than a few months rent. You'll certainly pay a respectable headhunter quite a bit.

mooreds13• 11 years ago

Hmm... Eventually the massively skilled labor pool will cost so much that the advantage will disappear. Good point about the investors, though.

We'll see. Perhaps it really will be an exogenous event which will halt the San Francisco craziness.

s73v3r10• 11 years ago

Most decent sized to large cities in North America have a large skilled labor pool.

mattzito• 11 years ago

It's a lot more complicated than that - there's a massive skilled labor pool, but at any given time, a huge percentage of them are gainfully employed and not currently looking.

Many of the really amazing labor pool members are recognized as being amazing and are compensated and rewarded in such a way that it will be difficult to draw them away.

Then those that are looking are being courted by every other company.

The converse can be true - it can be much easier to get very high quality talent somewhere that there is not a massive labor pool. You'll attract the people who don't want to live in SF or NYC, or want a certain lifestyle, or to be close to where they went to college, etc. etc.

I'm not saying that starting a company not in SF is inherently better, but that "insurmountable advantage" is also one of the biggest disadvantages about SF. Your mileage may vary.

untog• 11 years ago

It both helps and hurts - just yesterday Yelp admitted that the "Unicorn bubble" was hurting their profits:

http://recode.net/2015/07/29/yelp-admits-the-unicorn-bubble-...

For some reason it has only occurred to them now that hiring for offices in cities other than San Francisco might help them get talented developers.

chrismarlow93• 11 years ago

I think San Francisco is better for medium sized companies looking to IPO... I think you should get a base level somewhere much cheaper.

briandear• 11 years ago

I never understood why investors need to be 'close.' I also don't understand why most startups need an office. Basecamp is entirely remote with an office just for show. They only use it a few times a year. Unless you build hardware, an office is unnecessary. A dumb waste of money, especially early in a startup's life. I do some side work for a major international medical lab and their entire Dev team is remote -- and this is enterprise. I am not sure some flower delivery app that aggregates social sharing metrics using Go really needs to have an office. As far as 'access to talent,' that's a bulkshit metric as well. Remote workers can be anywhere. You can even hire foreign workers without needing visas. Most engineers aren't living in San Fran except for their jobs. Making $140k per year is the San Fran equivalent of minimum wage, especially if you have a family. Compare that cost of living to any other place in the country and San Fran engineers actually don't get paid very well at all. Add California taxes into it and I'm just not getting the attraction.

I live in the South of France in a big house that costs me $800 per month. I am about a 10 min walk from the TGV station that can take me to Paris in just over 2 hours. My kids are in French pre-k, I have top notch medical insurance that costs $139 per month to cover the whole family beyond the government insurance and I don't have to worry about my wife getting harassed by urine soaked homeless people at BART stations.

I can't speak for all engineers but given that there is an entire word outside of San Franscisco, I can see zero advantage to living there. Talent is there because they have to be. I'm sure a huge percentage would rather be working from a beach in Thailand or Tulum.

As far as investors, who cares? If you have a product people want to buy, investors will come to you. It's a myth that proximity matters. There were investors long before Silicon Valley startups were a thing. Plenty of billion dollar companies founded everywhere else. At this point, San Fran and the valley are prestige locations as opposed to offering any competitive advantages.

astazangasta• 11 years ago

Eventually we might consider that rent is just outright theft, we're not actually paying for value, landlords are parasites who suck surplus value from the economy, etc.

mooreds13• 11 years ago

You're paying for the location and services (well, with NNN leases, just location). What other value do you need?

sseveran2• 11 years ago

You could also build/buy your own office. Then there would be no landlord.

buro9• 11 years ago

we're not actually paying for value

The value you are receiving is location.

If you do not care for location, then rent office space in Tennessee where you can pay less than 1/4 of SF prices.

RogerL• 11 years ago

Fine, run your startup in the middle of the street. There's no value in the office, correct?

LandoCalrissian• 11 years ago

Then don't rent an office? I really don't know what you think the alternative would be. I assume the value comes from not having to work by a flaming barrel down by the river.

arielweisberg2• 11 years ago

Yes and no? They take on risk as well right?

They only get to be parasitic when the real estate market is dysfunctional and supply is constrained, possibly artificially. In some sense they are acting as gatekeepers to a limited resource and providing liquidity by setting prices high enough that only those with need are willing to pay.

Old_Thrashbarg• 11 years ago

Landlords deliver value by managing and providing a physical space to work in, but when the landlords have lobbies and use their political power to artificially restrict the supply of space and jack up the prices to no end, then it is evil.

The landlords are therefore parasitizing the economy.

Although this article is about commercial space, residential space is just as outrageously priced. I think there should be three things that should never be allowed to be artificially restricted just for the greed of a few: food, water and housing.

Here's a good Economist article on this: http://www.economist.com/news/briefing/21647622-land-centre-...

Osiris• 11 years ago

ZenPayroll is opening a Denver, CO office, looking to hire 100 people[1].

[1] http://fortune.com/2015/07/28/zenpayroll-jobs-denver-colorad...

czbond3• 11 years ago

Boulder is an incredibly difficult market to hire in. I was talkign to the head of Google Boulder when he mentioned they can't even get engineers hired there.

swehner• 11 years ago

Like Oakland. Can get to SF by BART if needed.

trjordan• 11 years ago

Not this weekend, you can't!

pmorici3• 11 years ago

My bet is that Baltimore is poised to become a big tech hub. There was a ton of money spent in the tech sector after 2001 and that is tapering off now and you have a bunch of engineers with 10 years experience and the low cost of living in Baltimore which makes for a lot of opportunity to try things. The city also has a very Art oriented quirky culture like SF had before it priced out all the creative people and a lot of other things going for it like lots of cheap housing, right on the ocean, and several universities and colleges.

benatkin• 11 years ago

right on the ocean

No, it's on the Chesapeake Bay.

bmelton• 11 years ago

I agree, but for very different kinds of startups.

Baltimore can be anything it wants to be, but what it's aiming at right now are a batch of far more conservative startups than you'd likely see in the valley.

B2B, marketing, government and fortune 500-based startups have every much the right to succeed in Baltimore as anywhere else, and with access to DC, certain markets are even better suited to Baltimore than to SF... but from everything I've seen, it would be a great deal harder to make something like Twitter work for a Baltimore-area VC, and where SF is killing it is in understanding the potential of network-effect startups that don't necessarily deliver immediate value, and to my eye, Baltimore VCs aren't remotely ready for that sort of gamble.

Shortmail and Sickweather are probably the closest I've seen to breaking that trend to date, but Shortmail's already shuttered, and I hope that doesn't sour the pool.

structural• 11 years ago

Baltimore is still relatively expensive and is (locally) still widely regarded as a dangerous city that most people don't want to go to, quirky or not. There's a reason that most of the tech jobs in the general area are around the DC suburbs (and pushing further out each year).

There's still incredible problems with getting good engineers to come to the general area as well: Baltimore/DC has SF-level cost of living but not nearly the amenities of the Bay Area. The weather here sucks most of the time, the general culture leans suit & tie, the traffic is just as bad if not worse, you don't have the redwoods/beaches/outdoor things nearby that many engineers tend to value. Moreover, there's still a major stigma against working remotely out here that hurts many East Coast businesses when looking for software folks.

tzs• 11 years ago

Speaking of Baltimore, as someone who knows almost nothing about it other than what I saw watching "Ace of Cakes" and from what I see when the city comes up in the news, I came across this map today [1], which left me wondering what is going on there.

It's a map of all murders in Baltimore, filterable by time period, race, gender, district, zip code, age, and cause of death. There are also some yearly charts below on the page.

What is going on with murders? 164 in the last six months, and they seem to be spread widely over the city, with just a couple murder-free sections (including one decent sizes one in the north part of the city, between 83 and 139).

Is those SF like art quirky culture areas, and the tech company areas, in the apparently murder-free areas?

For comparison Los Angeles has had 150 murders so far in 2015, even though it has 6 times the population [2]. Los Angeles county, with 16 times the population of Baltimore, has had 332 murders so far in 2015, so just over twice as many as Baltimore in the last 6 months.

(Both of the sites I cite are pretty interesting. Anyone happen to have a list of similar homicide exploration tools for other major cities?)

Note: I'm not trying to rag on Baltimore. Just astonished at the number and the geographic distribution of the murders there.

[1] http://data.baltimoresun.com/bing-maps/homicides/index.php?s...

[2] http://homicide.latimes.com/neighborhood/la-city/year/2015

scurvy3• 11 years ago

If crime didn't matter, New Orleans' tech scene would blow up a lot more before ballmers.

austenallred4• 11 years ago

I'm good friends with a startup that was trying to raise money for their Utah-based company. Really strong growth rate, revenue coming in, etc.

They went up and down sandhill road/SF, and got a couple really lousy offers for funding, and were shocked at how harsh the VC community can be.

Their board member (one of our closest/best mentors) recommended they go back, but make the first slide in their pitch deck "We're moving to San Francisco." They got five term sheets in the first two days, ended up raising from a top-tier firm.

Yes, this is anecdotal, but no, this is not an exaggeration. You can raise money being unwilling to go to the bay area, but you have to have a really compelling vision/growth rate. People have to be fighting over you.

VCs are weird.

Oakland or something may be a different situation (not sure if doing the South Bay thing would even save you any money - Palo Alto ain't cheap), but anecdotally people in Utah get told the same thing again and again. You can stay in Utah, and costs will be way lower, but you'll probably pay for it. (Note: our company is remote with headquarters in Utah)

mooreds13• 11 years ago

Did they move to SF?

jerrac2• 11 years ago

I wish people would do that. I know when I see jobs that interest me, they're almost always in SF or NYC. Neither location is somewhere I'd flourish. Seriously, what is the actual appeal of SF? I just don't see it.

rootedbox• 11 years ago

"nobody goes there anymore it's too crowded"

kevin_thibedeau• 11 years ago

The train system around NYC makes it practical to live in more idyllic locales than the heart of the concrete jungle. There are plenty of quaint towns built around LIRR and NJ Transit stations.

s73v3r10• 11 years ago

Huge tech community, almost perfect weather (it's not San Diego, but it's close), fairly liberal politics, diverse culture (means tons of interesting and fun cultural activities, and lots of interesting places to eat that you don't get somewhere that isn't a larger city).

You may not agree with or value those things, but a lot of tech people do.

dannyr• 11 years ago

How much time have you actually spent in SF?

As an SF Bay Area resident since 2009, there's no better place if you want a career in tech.

Yes, you can still have a great career outside of SF but it's a lot easier here.

I have lived and worked in 4 US cities and the best engineers are here. The selection of good jobs is immense. If you are a decent engineer, you have so many choices.

ebiester• 11 years ago

It depends on who you are.

Consider someone who likes walking to work, groceries, and everything they need; hates driving and owning a car; loves having top caliber arts and entertainment; feels more alive living in a place where people are on the street; and enjoy an evening walking bar to bar drinking with friends and not having to worry about a DUI on the way home, cities offer a lot.

That is Boston, Manhattan, and SF in this country.

(Oh, and I can hold my husband's hand in the city without getting weird stares. That's not possible in many parts of the country.)

thedufer2• 11 years ago

It sounds like you've found a big part of the appeal. People go where the jobs are, after all.

s73v3r10• 11 years ago

Remote work and starting the company elsewhere are pretty easy solutions to this problem.

stephengillie2• 11 years ago

If all of your employees are remote, what do you show your investors, partners, board members, and creditors when they want a tour of your facility? How do you show them that you've got smart people working on hard problems? For some (bad?) startups, this is an even more valuable function of engineers than engineering.

nostrademons4• 11 years ago

Tell them that facilities are obsolete and if they don't want to become an obsolete dinosaur, they should jump on the remote-working trend before it eats the world. Then show them your Slack channel, git commit log, and issue tracker to introduce them to the new world.

Some will probably leave, but then, they're dinosaurs anyway, and why would you want an investor who just doesn't get it?

sitkack3• 11 years ago

Rental prop staff, like say, WeWork.

justizin• 11 years ago

For some (bad?) startups, this is an even more valuable function of engineers than engineering.

It would be fantastic if that stopped being an important indicator.

djloche• 11 years ago

You do a 'team building' week once a year where you fly everyone in, do a team photoshoot and a 'productivity' photoshoot, and then provide paid-for options of fun things to do (ski pass, jetski / paddle board rental, company tab at a local bar, cook-off or potluck competition, short film competition, etc. ). Your team gets a short vacation from working, investors and press get photos and videos of people doing their job, and you don't have to pay for office space again that year. Hopefully your revenue exponentially scales to cover the linear expense as your team grows.

chrismarlow93• 11 years ago

You let your devs finish stuff and show them the product. What you built. Without interruption a small group of good engineers can build some amazing shit.

beambot• 11 years ago

what do you show [important people]...?

Profits.

SilasX• 11 years ago

Taking on significant, avoidable costs in order to signals qualities sounds like a failure mode.

It could be that there are cheaper ways to signal the health of an organization, or that they're not cheap enough to outweigh the SF premium.

mbillie13• 11 years ago

For some (bad?) startups, this is an even more valuable function of engineers than engineering.

How on earth is this healthy? If your "company" continues to exist by sucking up investment money gained by doing a song-and-dance with a group of folks in an office, but never churns out a product, this is success? Good lord.

s73v3r10• 11 years ago

Why do we care about the bad startups?

nosuchthing2• 11 years ago

Why is it just assumed economic downfalls and recessions should happen every 7-10 years?

Self fulfilling prophecy?

Bugs in the system?

mooreds13• 11 years ago

Experience. History.

Here's a graph from 2013 from Calculated Risk (an economics blog) that shows recessions in blue shading.

http://2.bp.blogspot.com/-cF1c7HUBzQg/UV7FqoIP9BI/AAAAAAAAZt...

icebraining• 11 years ago

The concept is called the Business Cycle: https://en.wikipedia.org/wiki/Business_cycle

As you can see from that page, the theories about what it entails and what causes it are many and varied.

chubot• 11 years ago

My hypothesis is that it is a real thing, and it has to do with human behavior. 7-10 years is enough time for enough people to forget the pain of a previous crash. It's enough time for a new generation to arise.

There are of course other cycles based on human time scales. In movie soundtracks, there is a rule that you should never insert a song 0-15 years old. It either has to be brand new, or older than 15 years.

Where does the number 15 come from? Human time scales. A half a generation. The number 5 would be too short, while 30 would be too long.

http://www.furious.com/perfect/culturecycles.html

nosuchthing2• 11 years ago

For an artificially structured system of agreed upon rules that are in everyone's best interest to optimize for prosperity, "human time scales" and emotional memory, in economic systems, should have little influence.

Especially considering historical blunders and clear lessons that we've learned.

burnte• 11 years ago

Bugs in the system, inherent to the worker units. Turns out evolution hasn't shaped up to work for the collective good very well or for very long. Once there's an exploitable aspect to the economy, certain types find it and disrupt the system as a whole, causing a rebalancing of the economy.

dataker• 11 years ago

While in SV, I couldn't understand the hate towards East Bay: it's fairly priced, close to the 'hub' and not as violent as otherwise portrayed.

Could anyone elaborate?

onedev• 11 years ago

Ego.

danans• 11 years ago

+ Fear of (on average) poorer population, classism, and other *isms encoded in the previous two.

Obi_Juan_Kenobi• 11 years ago

East Bay is great. Oakland is starting to look like a decent city.

Doesn't mean there aren't real disadvantages, but it's something most people/startups should at least consider.

Domenic_S3• 11 years ago

the East Bay is way bigger than Oakland/Berkeley. Walnut Creek, Pleasant Hill, the Lamorinda area, Danville, Pleasanton -- all very nice, safe towns with good bart access. No startups there though.

mdeeks• 11 years ago

Oakland is HUGE. You can't generalize it that much. There are so many sub area in Oakland that range from insanely dangerous and crappy all the way up to incredibly safe and beautiful (Rockridge, Piedmont). Also areas near Oakland like Emeryville are getting much nicer.

Unfortunately the prices in these places are also skyrocketing. I started paying $3k/mo for 1400sqft in a not great part of Emeryville last year. The current price for my exact same unit is $3400.

beatpanda2• 11 years ago

90% racism but people will talk in endless circles to avoid admitting it.

Also, sssshhhh. Stop with the hype. Ruining one city is enough.

Epenthesis• 11 years ago

I always thought a BIG benefit of SoMa is the fact that you can draw employees from East Bay and South Bay (as well as SF itself).

On the other hand, a, say, San Mateo -> Oakland commute is pretty much untenable.

jwilliams• 11 years ago

Yup. This is a huge advantage to SoMa. I even hear hesitations around FiDi as it's not easily accessible by Caltrain (let alone Oakland).

The Central Subway and new Transbay Terminal might alter this. That said, I don't think the new Transbay will directly link with BART -- will still be a walk, which is a bit of a shame.

jtfairbank3• 11 years ago

I live in West Oakland and the favorite game is still "fireworks or gunshots". Its a great place to live if you're in your 20s, but I wouldn't want to move my family here. Maybe up by Berkeley is better?

some-guy• 11 years ago

I have lived in West Oakland and currently live in Adam's Point (both in Oakland's borders) and it feels like an entirely different city.

beatpanda2• 11 years ago

Huh, that's funny, because West Oakland is mostly families and they are fighting for their lives to stay in their neighborhood due to pressure from people like you.

P.S. if you're scared, move.

klipt2• 11 years ago

East Bay rents went up ~30% in the last year. So people are moving there, and so the wave of gentrification spreads outwards...

chaostheory• 11 years ago

Is it that much of a disadvantage to get offices really close to Bart stations outside of SF?

lkrubner2• 11 years ago

There are already several comments on this Hacker News thread where people suggest things like remote work. Others suggest moving to less expensive cities. Someone mentioned Tennessee. "mooreds" made the suggestion "consider starting a company outside of San Francisco". But such comments ignore (are in denial? are in defiance?) what is actually happening, which is described in the 3rd sentence of the linked article:

"the migration of startups from the Peninsula to San Francisco have led to the lowest vacancy rates ever"

The big move away from the cities played out in the USA as automobiles became popular. The trend started in the 1930s and was at its peak during the years 1945 to 2000. It's worth noting that what we are looking at now is some re-centralization. That may be surprising or counter-intuitive, but since it is happening, it is worth investigating why it is happening. And all of the folks who think remote work is the answer might want to ask themselves why the ease of remote work is not offsetting the trend that's moving jobs into place like San Francisco and New York.

famousactress• 11 years ago

"...why the ease of remote work is not offsetting the trend that's moving jobs into place like San Francisco and New York"

Because it's scary. If you're Google or Facebook you don't have to bother with it because people will move to you. If you're startup whatever.io then you want to avoid risk that isn't directly related to your purpose so you probably try to park next to Google or Facebook and work hard on other solutions to the "how do we hire" problem.

That said, it actually is offsetting that trend. It's just doing it too slowly to be noticed, but as someone who's worked remotely for an SF startup for almost 6 years and pays attention to the Who's Hiring remote posts, etc. I can tell you there's been a somewhat dramatic uptick in remote hiring in the past couple of years.

mbillie13• 11 years ago

All fair points, but remote work also has increased massively ( http://fortune.com/2015/02/12/lessons-learned-from-3-compani... ). It is interesting to consider that well-paid remote workers, free to live where they choose, may also be choosing to live in these bigger cities. I'm fully remote and I live in a city, albeit a relative small one (SLC), when I could easily pay a ~$300/mo mortgage for a small rural house in the middle of nowhere if I chose to. I suspect that re-centralization is orthogonal to, rather than antithetical to, remote work.

Domenic_S3• 11 years ago

~$300/mo mortgage for a small rural house in the middle of nowhere

How's the internet access out there?

_delirium8• 11 years ago

It's worth noting that what we are looking at now is some re-centralization.

I think there are some local re-centralization trends, but it doesn't really show up in the overall numbers. Most of the fastest-growing areas in the U.S. are suburban, e.g. the Dallas suburbs are growing far faster than SF is.

Fivethirtyeight had a piece on this focusing on millennials: http://fivethirtyeight.com/datalab/think-millennials-prefer-...

danieltillett2• 11 years ago

Has anyone done the analysis at which point the higher rents and labor costs outweigh the benefits of access to low cost capital? At some point it makes no sense to start a new business in the SF area even when taking into account access to investors.

blackjack48• 11 years ago

Another reason I didn't see mentioned: many open floor plan spaces are still permitted as light-industrial spaces. Due to the intricacies of the city's zoning laws and unfortunate politics, landlords are at a greater risk of receiving a zoning violation for leasing space to a tech company than they would be if they found a "blue-collar" tenant.

bmir-alum-007• 11 years ago

If you're a startup founder with fiscal authority, do your darnedest not to sign long-term anything unless it reduces both long-term cost and risk more than it adds to liabilities. There are a bazillion dot-coms in the 1990's that optimistically over-expanded and got stuck paying rent for years afterward on empty buildings they furnished but never used.

Seriously, expand only if you have people stacked three high and just enough to cover the next 1-2 years of conservative growth. And don't spend arms and legs on new furniture or other generic, high-depreciation items, get gently used kit from liquidators and recyclers. Enterprise shops throw out perfectly good stuff because they're redecorating or it's lifecycled out because it's recurring budgeted. Capture every advantage of their waste to your benefit.

Put another way, don't waste cash to look rich, spend some to make staff and yourself comfortable enough to get the job done and keep morale/productivity up (Penny wise, pound wise.) A badge of honor for entrepreneurs is spending as least as possible with the best results. Only looney billionaires buy diamonds to use as doorstops. (Sure most startups flush cash down the drain, but there's no reason for founders to inordinately waste investor's cash because it counts against their reputation in future dealings.)

paulsutter• 11 years ago

It was so different back in 2006. At Quantcast, we sublet a big space that Snocap (Shawn Fanning's second company) had abandoned when they shut down. It was cheap I dunno maybe $2/sqft/mo. We paid $1 for all the existing furniture.

Then we needed to sublet our old space at 2nd and Townsend. Shawn Fanning's new company Rupture wanted the space. We hadn't moved out the furniture yet, and they were interested. So we sold it to them for $1. Way more relaxed back then.

davemel374• 11 years ago

Honestly, if 42floors just discovered this...they should never have gotten into the commercial real estate business.

Real Estate 101 is about leverage and the cost to borrow is directly impacted by the tenant mix and their respective credit ratings.

How do you operate in the real estate leasing game for years without knowing what landlords want?!

farooo123• 11 years ago

Why not sign shorter term leases??

InclinedPlane• 11 years ago

In SF? All they have to do is wait 10 seconds and someone else will be around to rent to. Rent is going up while vacancy rates are plummeting, that's a landlord's market.

serve_yay• 11 years ago

Sucks when the free market doesn't work out in your favor, eh.

dylanjermiah3• 11 years ago

Rent control and outrageous zoning laws are _not_ a free market. It's funny, and sad, that the two cities who have the most laws in relation to accomodation, NY and SF, are both of the cities who have the highest prices.

AlexeyMK• 11 years ago

One solution that is not being discussed is for VCs to offer office space for start-ups.

VCs have longer time-horizons (a typical VC fund will be spent over 5 or so years) and appear more stable to landlords. In addition, one of the toughest problems for VCs as I understand is dealflow - when it comes to a super-competitive round, Andreessen or Sequoia will often push other VC firms out of the round by throwing their prestige around.

SF Office space could make the difference to a hot start-up looking to raise their Seed or Series A and move to the city, especially coupled with a time horizon of only 12-24 months. It may not be enough to lead a competitive round, but may certainly enough to get a piece of it.

davemel374• 11 years ago

A very clever idea...they dont even need to offer it for free..they just need to sign the lease or buy the building and lease it to their portfolio companies.

Edit: this would be a really clever idea for a fund to raise a round just to buy real estate to lease to their portfolio companies. It will give investors a chance at indirectly investing in startups with secure value backing the investment.

steven2012• 11 years ago

It's a clever idea when the market is going up, and a really dumb idea when the market drops underneath them. If they are locked into a very high rate, and the market goes down, which is always does at some point, then people will be questioning the decision since they would either need to force their companies to pay a ridiculous rate, or lose money trying to sublease it at market rate.

The last thing VCs need to be is a landlord.

prostoalex4• 11 years ago

The high rent problem emerges only when the market is over-heated, and subsides when there's a correction.

Anybody doing that would almost certainly be buying high and left holding the bag when an economic downcycle arrives.

YokoZar• 11 years ago

It's a good idea, and I know it's been done at least once before. For instance, the youweb incubator operates this way.

flashman• 11 years ago

How likely is a startup to trade points for office space? As in, a different class of VC which backs the company not with cash but with a location.

zeckalpha• 11 years ago

Another way to do it would be a startup specializing in office space. Oh, wait? 42floors?

qq66• 11 years ago

Startups already trade points for office space, by selling points to investors and using the proceeds for office space (among other things.

jt2190• 11 years ago

Wouldn't this distort the VC's portfolio? Institutional investors give VCs their money to put into high-risk, high-reward investments, not real estate leases. How would they justify this?

joelrunyon• 11 years ago

Higher percentage equity for less money.

andreyf• 11 years ago

Institutional investors give VC's money part of which their investees then put into real estate leases anyway. Cutting out the hassle for the startup that should be focusing on product seems efficient in more than one way.

akshatpradhan• 11 years ago

Don't mean to derail from topic. What's value of an average seed round in SF right now?

danieltillett2• 11 years ago

This makes sense especially since the limited partners are probably already significantly invested in commercial real estate. What would make more sense is just to get the limited partners involved.

On a related note there is no reason VC could not do the same with talent. The could be hiring talent and feeding that into their portfolio. They could also facilitate easy movement of people between companies in the portfolio so that you get better team fit. The only problem with all this is it takes effort.

mmagin• 11 years ago

OMFG, you reinvented the startup incubator!

brudgers2• 11 years ago

I once heard a story that Disney spent twenty years and several billion dollars on developing Celebration and made about as much money as one of their third tier animated movies...something in the 100 million dollar range. Which may or may not be true, but it does accurately portray the long time horizons of real-estate (e.g. thirty year mortgages) and the relatively low returns compared to startups.

For a VC firm the real-estate market and rising rents have a limited effect on the success of their investment portfolio and the returns from real-estate don't justify investing money that could otherwise be put into their core business of investing in startups. A $100,000,000 can fund a lot of startups. It's not going to buy a sound diversified portfolio of San Francisco office properties.

prostoalex4• 11 years ago

The seed-stage VCs don't have the funds to plunk down a few million to lock in a lease, and by the time you raise an A round or further you're pretty much expected to have an address.

I guess Plug & Play Ventures is the outlier here, having started in real estate.

RollAHardSix• 11 years ago

It's certainly an interesting idea, and I have to admit it's one I've pondered over in the past as being an 'opportunity' for a small competitive advantage in closing a deal.

The biggest problem is capital tie-up. Buildings are expensive, in Cali, they are even more expensive. I've always wanted to try this idea though, perhaps in a large converted-warehouse or even a traditional down-town office-space somewhere like Austin.

Again though we must ask ourselves, what's more likely to help a start-up, office-space (in a time when more and more companies are moving towards virtual working arrangements), or an additional 100k/200k? Just some food for thought, like I said, if done right, it could be a very good perk to offer, but it's hard to justify the cost.

Cough And, shameless self-promotion, I'm looking to move into the VC space in an entry-level analyst/associate position if anyone has any exciting opportunities. Or even boring opportunities, I like boring too. :)

Shinchy• 11 years ago

It's pretty common for a VC to give a start-up a corner of their office space here in London. There are a few in my office, seems crazy it's not more common place in SF.

urda• 11 years ago

Here's a crazy thought:

Maybe it's time to consider another location for startups. San Francisco is reaching it's limits, and let's be honest technology can really launch from anywhere. Let's get some other cities moving, San Francisco has enough.

pmichaud• 11 years ago

Critical mass is like golden handcuffs here, I think.

dylanjermiah3• 11 years ago

Has already been tried countless times, and all have failed so far.

NotSammyHagar2• 11 years ago

Seattle hasn't failed, instead it is booming. There's almost too many startups, too many job offers. I don't want anyone else to move here, we have too much traffic, home prices rising almost too fast (I say that even though I own a home :-)).

chvid2• 11 years ago

I am going to ask a really stupid question and then run for the hills.

The article goes "low cost of capital", "5 year lease", "startups struggling to get their offers accepted by a landlord", "large security deposits" ...

Why don't these wellfunded startups just buy their own office buildings?

_delirium8• 11 years ago

They're well-funded for a tech startup, not Donald Trump levels of funding! Prime SF commercial real-estate is going for $500-$1000/sq ft these days, so buying, say, a 5-story, 50,000-sq-ft office building will run you $25-50 million. Tech VCs don't want that level of investment tied up in commercial real-estate; if they wanted to do that, they'd form a real-estate investment fund instead.

tomelders• 11 years ago

sound to me like a conflict in a a landlords desire for long leases and a startups desire for short leases.

Of the two, it's more practical for landlords to accept shorter leases.

Landlords are trying not to rent to startups in San Francisco

Related Stories