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Landlords are trying not to rent to startups in San Francisco
- rdl 11y agoObvious 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 11y agoIf 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.
- deleted 11y ago[deleted]
- jmonegro 11y agoWeWork 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.
- rdl 11y agoWorst 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.)
- thaumasiotes 11y ago> When you have ~unbounded upside and capped downside, lever the fuck up. I don't get it. Imagine I start a business offering the following opportunity: you pay me $100, I give you a fair coin, and you flip it as many times as you like. If there was no tails, I pay you $1 for every heads you flipped. Your upside in patronizing my business is unbounded. Your losses are capped at however much you decide to invest. How much leverage is it appropriate for you to invest with? Now, this isn't a case of capped downside in the sense of "you can lose at most $50, no matter how much you invest", but I doubt that's what you were talking about? Certainly that sort of situation is unlikely to come up in any context.
- nostromo 11y agoWeWork is selling risk reduction for cash. Should there be a downturn in tech, WeWork will be left holding the bag.
- ChrisBland 11y agoI'm working out of WeWork (Chicago office) and I think the SF WeWork is much different from most of their other locations. While there are a few venture backed startups here, most of the companies tend to be small businesses or single person companies that were previously at places like Regis or working out of Starbucks. For example some companies here: [model agency, recruiting agency, marketing firms, lawyers, accountants, payroll servicing company, a sunglass maker, stock traders] So while a downturn in Tech would hurt them in some of their locations, at the others I don't think the pain would be as bad. We were hoping there would be more tech companies here and were surprised at the number of non-tech firms. FWIW we really enjoy it and have grown now to our third office as we add people. Thats the real value here, month to month leases so we can scale up or down as our team evolves.
- rkroondotnet 11y agoSame goes for many of the NYC offices. Our space near Empire State seems to have a lot of consulting businesses that would otherwise be renting out something more complicated (need their own receptionist, water bills, internet bills, blah blah blah)
- nandemo 11y agoLandlords aren't dumb. Their payoff is pretty much binary: ($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?
- fredkbloggs 11y agoThis 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 11y agoI 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.
- fredkbloggs 11y agoYeah 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 11y agoAgreed, 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.
- comrade1 11y agoWow. I remember this is exactly what happened in 2001 and 2007. Maybe things are different this time.
- mooreds 11y agoLarge 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 11y agoAs 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 11y agoIn 2007 a lot of Europeans thought that EU and China would decouple themselves from the emerging debt/housing crisis in the USA.
- mooreds 11y agoAh, 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/
- mooreds 11y agoOr, 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.
- swehner 11y agoLike Oakland. Can get to SF by BART if needed.
- meatysnapper 11y agoI 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.
- mooreds 11y agoHmm... 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.
- s73v3r 11y agoMost decent sized to large cities in North America have a large skilled labor pool.
- 11y ago
- s73v3r 11y agoRemote work and starting the company elsewhere are pretty easy solutions to this problem.
- stephengillie 11y agoIf 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.
- nostrademons 11y agoTell 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?
- ssalazar 11y 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. And then what data do you show them to back up that grandiose proclamation?
- nostrademons 11y agoMy comment is intended to be semi-ironic, a commentary on how the tech industry works by instilling FOMO (fear of missing out) in people who are deathly afraid that somewhere, someone is doing things better or more efficiently than they are. But to answer your question - you don't show them data. You show them social proof. Show them the tools - GitHub, Slack, Google Docs, videoconferencing - and people using them, and the companies that have made it work, like GitHub, Automattic, Google, Cisco, etc. The whole point is to create an emotional reaction, not a rational one.
- nosuchthing 11y agoWhy is it just assumed economic downfalls and recessions should happen every 7-10 years? Self fulfilling prophecy? Bugs in the system?
- mooreds 11y agoExperience. 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/AAAAAAAAZtU/OQu9QAiguJY/s1600/UnemployMar2013.jpg http://2.bp.blogspot.com/-cF1c7HUBzQg/UV7FqoIP9BI/AAAAAAAAZt...
- icebraining 11y agoThe concept is called the Business Cycle: https://en.wikipedia.org/wiki/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.
- burnte 11y agoBugs 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.
- chubot 11y agoMy 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 11y ago
- lkrubner 11y agoThere 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 11y 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.
- mbillie1 11y agoAll fair points, but remote work also has increased massively ( http://fortune.com/2015/02/12/lessons-learned-from-3-companies-that-have-long-embraced-remote-work/ 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.
- dataker 11y agoWhile 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?
- Obi_Juan_Kenobi 11y agoEast 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_S 11y agothe 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.
- pinaceae 11y agosure there are, a lot focuses on enterprise though. the peoplesoft legacy lives on in various forms over here.
- pinaceae 11y agosure there are, a lot focuses on enterprise though. the peoplesoft legacy lives on in various forms over here.
- pd1 11y agoThose places are pretty far from SF though. Not unbearable, but you're probably looking at >1hr door to door.
- Domenic_S 11y agoThat's the point - you don't have to live in SF or rent office space in SF, you can avoid SF altogether while still having the benefits of the startup scene an hour away.
- deleted 11y ago[deleted]
- chaostheory 11y agoIs it that much of a disadvantage to get offices really close to Bart stations outside of SF?
- danieltillett 11y agoHas 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.
- deleted 11y ago[deleted]
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- blackjack48 11y agoAnother 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 11y agoIf 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 11y agoIt 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.
- davemel37 11y agoHonestly, 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?!
- chvid 11y agoI 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 11y agoThey'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 11y agoWhy not sign shorter term leases??
- InclinedPlane 11y agoIn 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 11y agoSucks when the free market doesn't work out in your favor, eh.
- dylanjermiah 11y agoRent 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 11y agoOne 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.
- davemel37 11y agoA 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 11y agoIt'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.
- davemel37 11y agoI dont agree and landlord is hardly the word I would use for NNN lease tenant Management. In a market downturn in a worst case scenario...this real estate has underlying value besides its immediate income producing potential. It will likely retain more value than their actual startup investments. Source: Im a former commercial real estate leasing broker and former commercial real estate underwriter.
- deleted 11y ago[deleted]
- urda 11y agoHere'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 11y agoCritical mass is like golden handcuffs here, I think.
- dylanjermiah 11y agoHas already been tried countless times, and all have failed so far.
- NotSammyHagar 11y agoSeattle 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 11y agoAgree 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.
- tomelders 11y agosound 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.