Office rents rise in once-blighted Mid-Market

The once-bleak stretch of largely empty buildings has had $2.4 billion in development and property sales since 2011, including projects by Hudson Pacific Properties, AvalonBay Communities and Shorenstein Properties, according to CBRE. San Francisco’s surging job growth and scant new-office supply sparked the renewal, along with a 4.4 percent vacancy rate in the South of Market neighborhood that constrained growth there.

“We knew there was going to be overflow, but nobody thought it would be like this,” said Victor Coleman, chairman and chief executive officer of Los Angeles, Hudson Pacific, the landlord at 1455 Market St., a 1 million-square-foot data center that lured Square as an anchor tenant. “This situation is pretty unique.”

Quoted rents of $55 per square foot at that building and $57 per square foot at Shorenstein’s Market Square, the former Furniture Mart building where Twitter moved last June, have soared to levels similar to those in SoMa, CBRE data show. In both properties, floors spanning a city block allowed for creative conversions with abundant common areas and value-added amenities.

Twitter is paying $30 per square foot for 210,000 square feet and a $55 rate for an additional 85,000 square feet, said a source informed about the lease who asked not to be identified. The company also has exclusive use of a roof deck.

At 1455 Market, Square is paying $39 per square foot on average for 330,000 square feet, while online car-hire service Uber is renting 88,000 square feet at a $48 rate and is set to move early next year.

Square was committed to staying in the city after it outgrew its space in The Chronicle Building just south of Mid-Market. The new offices are more than four times larger.

The payments company developed its prototype device in its Chronicle Building offices. The historic Fifth and Mission newspaper building is owned by the Hearst Corp., which publishes The Chronicle. Yahoo is keeping its Financial District office and expanding to the Chronicle Building space vacated by Square, which grew to more than 600 employees from half that a year ago.

Mid-Market’s office vacancy rate was 14 percent in the second quarter, down from 25 percent in the first quarter of 2011, before the Twitter lease and Market Square renovation, according to CBRE. About 515,000 square feet of the district’s 3.7 million total was available for rent as of June 30.

SoMa, home to Google and Salesforce offices, had the city’s lowest vacancy rate in the second quarter and average rents of $55.65 per square foot, up 12 percent from a year earlier. The district has 6.3 million square feet of offices.

Apartment projects under way in Mid-Market include developer Crescent Heights’ NEMA luxury towers on 10th Street and AvalonBay’s Ninth Street high-rise. About 500,000 square feet of new retail and office spaces by Hudson Pacific, with joint venture partners Cypress Equities and Carlyle Group, is rising near Fifth Street.

San Francisco’s April 2011 enactment of a payroll-tax break for companies that relocated to certain Mid-Market properties included Twitter’s building and spurred other technology tenants to follow, said Oz Erickson of Emerald Fund, a housing developer.

“The Twitter tax break provided exactly the right stimulus to keep valuable, high-paying jobs in San Francisco,” said Erickson, who is converting an office tower on Van Ness Avenue two blocks north of the tax-break zone into 400 apartments.

Across the U.S., the technology industry is growing at four times the pace of the broader economy, Jones Lang LaSalle said in an Aug. 15 report. San Francisco ranks as the nation’s top technology office market, based on factors such as job growth and venture-capital funding, the brokerage said.

Employment rose 27 percent in technology manufacturing and services, and the city’s $736 million in venture-capital funding beat Silicon Valley’s total and doubled New York’s, according to data compiled by the brokerage.

Just two years ago, Mid-Market had more vacant storefronts and single-room residence hotels than any neighborhood, with 31 percent of households earning less than $15,000 – triple the citywide average percentage of households in that bracket – a multiagency survey found.

Reconciling “all this money coming into the neighborhood” with the area’s high poverty rate remains a challenge, said Ellyn Parker, project manager at Central Market Partnership, which oversaw the survey. Homeless people began living in alleys and plazas to be near clinics for mental-health and substance-abuse services, she said.

“It’s a fragile population that doesn’t have anywhere else to hang out,” Parker said.

Some new tenants have seen crime, poor sanitation and “abject filth” up close, said Peter Fenton, a partner at Benchmark, a Menlo Park venture firm that opened an office at Sixth and Market to be close to startups.

The tenants aren’t interested in a “whitewash” of urban grit, just basic public safety, he said. “There was a gunshot victim half a block from our office a week ago,” Fenton said. “We get a report on the block where we are that shows routine stabbings. The city has to make a decision as to whether or not they want to get serious about violent crime and public urination.”

The ground floor of Hudson Pacific’s 901 Market St., a 250,000-square-foot office and retail project at the corner of Fifth, is being renovated within a 1912 facade for anchor tenant Nordstrom Rack. The building’s most recent tenant, HotelTonight.com, has fourth-floor offices that overlook the 125-year-old Powell Street cable-car turnaround. The online booking service signed a lease in October at $51 per square foot.

Seven blocks up Market Street, the former Bank of America data center, purchased by Hudson Pacific for $95 million, is undergoing improvements such as $7 million in new windows that will change the look and feel of interiors, including Square’s new space, Coleman said. The company moves in Sept. 30.

“The reality was that the city didn’t have a lot of square footage available, so growth had to go in this direction,” he said. “People told me I bought the ugliest building in San Francisco, but that’s great because the only way to go is up.”

Dan Levy is a Bloomberg reporter. E-mail: [email protected]