An Oasis Surrounded by a Sea of Misery

San Francisco is certainly an odd ball city, however as far as investment in real estate is concerned, it is cookin’.  While there are still a lot of issues, the economic boost from social media, biotech, clean tech, especially in South of Market (SOMA), are creating a new bubble. Or in other words LaLa Land, frothy investment market, overheated environment, crazy numbers – whatever else you would like to describe it, it’s here ….again.

When one takes in social media, biotech, clean tech, VC’s, financial sector, you get to feel there is money out there and lots of it. Added to the new companies like Twitter, Linked In, Zynga are the established corporations including Google, Wells Fargo, etc., and then on top of that the billions that the City will reap from the America’s Cup, there is a strong financial foundation in this wacky city.

As you float on a cloud placed lovingly over S.F. County, you don’t have to go very far to see a very apparent drop in economic stability. The froth quickly diminishes into the reality of an economy that is really struggling, and of course the dramatic drop in the financial markets have not helped either. So beside the outlying areas of S.F. including Marin, Peninsula,  South Bay and some cities in the East Bay like Lafayette, Walnut Creek, the tough love shows up very quickly.

Real estate pricing in the City is in many ways at the level of 2006/’07, some areas even higher. Multi-family is getting to all-time highs. Cap rates are jamming down to the low 4 cap range. While there is still millions of square feet of vacant office space, the pricing for core assets are at a premium and SOMA is definitely at a new high with leases well over $3/ft. and “creative space” selling as high as $300/ft. New construction projects are back into high gear, approved developments that you couldn’t give away a year ago are now going for lofty prices.

A short drive away to Oakland and the world changes dramatically. Millions of square feet of vacant space, high unemployment.  This is the world for most of the US and it’s only going to get tougher……. Button down the hatches.

The story is simple, we need to innovate. There are 500,000 new startups every month in the US. Only .014% are engaged by the VC’s. Most never make it from A to B,  mainly because the political and financial system is so broken that anyone with a good idea is set up to fail. We need to set up a system where a majority make it from A to Z. You almost have to set up an island of safety to protect these companies or they are doomed to fail.

San Francisco for all its faults is fostering innovation, whether through the skill of its leaders or dumb luck. Regardless, the rest of the US has to follow.