
Landlords are trying not to rent to startups in San Francisco - jtbed
https://42floors.com/blog/cre/landlords-are-trying-not-to-rent-startups
======
AlexeyMK
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.

~~~
jt2190
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?

~~~
andreyf
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.

~~~
TheSpiceIsLife
And the institutional investors likely also have a sizeable commercial real
estate portfolio, so it's just a bunch of money going around in circles. I
think the general term for this is 'the economy'. We probably group similar
assets in to 'industries' because certain schools of thought believe this
generates more economic activity, also for convenient accounting.

~~~
lmm
> We probably group similar assets in to 'industries' because certain schools
> of thought believe this generates more economic activity, also for
> convenient accounting.

Accounting is much easier than it used to be, so we can afford to be a bit
more inconvenient. Maybe it's time for a vertically integrated startup service
provider. Don't VCs already do things like arrange legal services for their
portfolio companies?

------
fredkbloggs
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.

~~~
ChuckMcM
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.

~~~
nostrademons
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.

~~~
rconti
Not to pile on too much, but the Fed has been amazingly slow to raise rates
and only shows signs of doing the most timid increase. It's the cheap money
that's fueling the mad rush, yes, but it's a blunt policy tool being used to
help along parts of the country that are really still struggling.

Until Detroit and Stockton and Pittsburgh are doing well again, aggressive
policy is going to continue to fuel massive growth in SF and the Bay Area.

Tightening is not coming fast nor aggressively.

~~~
khuey
What happens if those areas simply don't start doing well again? Large parts
of America have been declining for generations (West Virginia, much of Ohio,
etc)

~~~
fredkbloggs
Which is likely. Echoes of the eurozone here for sure; SF probably needs 8%
interest rates but even 0% is doing very little for the Rust Belt and other
perennially depressed regions. Now, the eurozone critics think the problem is
lack of fiscal union, but the US suggests it goes a lot deeper than that.

~~~
scarmig
In principle, couldn't the issue be too few fiscal transfers? I.e. San
Francisco should be paying even more into the federal coffers, to be
redistributed even more to Alabama and New Mexico?

Or, thinking about the other direction, even restricting ourselves to within
California San Francisco and the Bay Area single-handedly pay for a massively
disproportionate part of state government services and redistribution. Perhaps
it's time to go way back to metropolitan city-states as the proper scale of
government.

~~~
sib
See Tim Draper's proposal for splitting California into 6 separate states:
[https://en.wikipedia.org/wiki/Six_Californias](https://en.wikipedia.org/wiki/Six_Californias)

~~~
scarmig
It doesn't make sense to separate Marin from San Francisco. And while we're at
it, I'll take Sonoma and Napa. Maybe Davis too, because, you know, YOLO.

------
mooreds
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.

~~~
meatysnapper
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.

~~~
briandear
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.

~~~
compostor42
>Making $140k per year is the San Fran equivalent of minimum wage

Is this really true? Seems far-fetched. Isn't that $20-30k higher than the
Google base starting salary?

~~~
tayo42
No, I don't know why people always say that. I live on less then half that. I
eat out, drink, do stuff on weekends and pay my school loans and bills. Thats
like 7000 a month? If you can't get by with that comfortably high cost of
living is not your issue...

~~~
compostor42
If you don't mind me asking, what are you paying for rent? Been considering
moving out there so trying to get a feel for things.

~~~
logical42
I have an exceptional deal on my 2 bedroom in Mountain View which costs me
around 2400/month. I believe the current market rate for my apartment is
something like 3300.

If you're willing to live a bit further out (like Milpitas/Santa Clara), you
can live somewhere for under/around 2000, which (when split with a
spouse/partner/roommate) can be reasonable given the salaries in the area.

~~~
compostor42
So I'm assuming you split the place with someone else? I imagine it is no
trouble to find roommates out there, or am I wrong?

Looks like I'd have to live with roommates if I moved out there.

------
lkrubner
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.

~~~
mbillie1
All fair points, but remote work also has increased massively (
[http://fortune.com/2015/02/12/lessons-learned-
from-3-compani...](http://fortune.com/2015/02/12/lessons-learned-
from-3-companies-that-have-long-embraced-remote-work/) ). 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_S
> _~$300 /mo mortgage for a small rural house in the middle of nowhere_

How's the internet access out there?

~~~
mbillie1
Slow but available. There's a lot of empty land if you aren't picky about
where you live...

------
rdl
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.

~~~
fredkbloggs
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.

------
bmir-alum-007
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.)

------
dataker
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?

~~~
jtfairbank
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?

~~~
beatpanda
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.

~~~
jtfairbank
Not scared! Most of the families I've talked to around my neighborhood want to
move out to a better / safer place. Could just be my specific block though.

------
blackjack48
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.

------
paulsutter
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.

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

Self fulfilling prophecy?

Bugs in the system?

~~~
chubot
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](http://www.furious.com/perfect/culturecycles.html)

~~~
nosuchthing
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.

~~~
chipsy
It requires human effort to maintain any emotional memory. If you don't
contact your relatives with a card or a call to remind them you exist, you
don't enjoy a good relationship with them. And if the government doesn't
periodically run campaigns like "don't waste water", people forget to conserve
it. These are commons goods that the market doesn't ascribe any value to
unless it is directly related to current product and service. Hence, we are
flooded with advertising. There is advertising everywhere. But there is no
such thing for "remember the last boom and bust."

------
urda
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.

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

~~~
NotSammyHagar
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 :-)).

~~~
dylanjermiah
Agree on Seattle. I think you can't 'create' a SV. It happens bottom up as
opposed to top down. For example, what if Leland Stanford Jr didn't die
prematurely at age 15 in 1884 -- and his parents didn't build a University in
his honour? Chances are SV would not be SV.

------
danieltillett
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.

------
davemel37
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?!

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

------
tomelders
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.

------
chvid
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?

~~~
_delirium
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.

------
farooo123
Why not sign shorter term leases??

~~~
InclinedPlane
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.

------
s73v3r
Remote work and starting the company elsewhere are pretty easy solutions to
this problem.

~~~
stephengillie
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.

~~~
mbillie1
> 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.

~~~
chrismarlow9
Welcome to the valley.

------
comrade1
Wow. I remember this is exactly what happened in 2001 and 2007. Maybe things
are different this time.

~~~
mooreds
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.

~~~
meatysnapper
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.

~~~
chvid
In 2007 a lot of Europeans thought that EU and China would decouple themselves
from the emerging debt/housing crisis in the USA.

~~~
mooreds
Ah, decoupling.

I don't think the US is decoupled at all. It's just the least crappy house in
the neighborhood.

See Lou Barnes for some interested commentary on this:
[http://pmglending.com/loubarnes/credit-
news/](http://pmglending.com/loubarnes/credit-news/)

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

~~~
dylanjermiah
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.

