How Digital Platforms Reshape Office Market of San Francisco?

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Platform companies constitute a key segment of the digital growth machine.

Laura Schmahmann, Alex Ramiller & Desiree Fields (2023) Platform Firms, Commercial Real Estate Cycles and San Francisco's Growth as a Tech Cluster, 2008–2020, Annals of the American Association of Geographers, DOI: 10.1080/24694452.2023.2242460

Picture source: https://www.wsj.com/articles/remote-work-is-reshaping-san-francisco-as-tech-workers-flee-and-rents-fall-11597413602

Given its proximity to Silicon Valley, San Francisco is uniquely positioned to successfully accommodate the growth of technology over the past two decades. With the rise of digital platforms and algorithms contributing to the dramatic expansion of the tech industry in San Francisco, the downtown office market in San Francisco has experienced rapid growth. However, San Francisco's exclusively tech-led growth model has revealed weaknesses in the aftermath of the pandemic, with economic activity in San Francisco recovering to a far lesser degree than in many cities around the world.

The University of Toronto School of Cities' Downtown Recovery Web site, which uses mobile phone device counts as a proxy for economic activity, ranks San Francisco seventy-first out of seventy-one cities across the United States, Canada, and Europe, with downtown activity at only 31 percent of prepandemic levels in Fall 2022 (compared to Fall 2019). By comparison, New York ranks twenty-sixth with downtown activity at 74 percent of prepandemic levels, London ranks twenty-eighth with downtown activity at 72 percent of prepandemic levels, and Toronto ranks fiftieth at 53 percent of prepandemic levels for the same period.

In 2019, San Francisco's market for office space was on the upswing, with the tech industry serving as the city's primary driver of demand for office space and expansion of the commercial real estate market. The pandemic and the shift to remote work upended office market dynamics across the United States, but the effects are especially pronounced and persistent in San Francisco, which as of June 2022 had lower occupancy rates than any other major city in the country.

A new online paper in the Annals of the Association of American Geographers, "Platform Firms, Commercial Real Estate Cycles and San Francisco's Growth as a Tech Cluster, 2008–2020," focuses on commercial real estate, the backbone of the city's growth machine, and analyzes the evolution of San Francisco's office market from 2008-2020 through a case study of downtown San Francisco, analyzing the relationship between capital, technology, and urbanization through the lens of the commercial real estate market.

Platform capitalism, urban space, and the digital growth machine

Platform capitalism is a mode of accumulation that relies on rapid scaling to establish market dominance by turning "social interactions and economic transactions into services that take place on the company's platform". Platform capitalism is underpinned by network effects (in which increased value results from increased users), the abundance of free digital data users create through interacting with platforms (data operate as capital and are subject to the logic of accumulation), and speculative finance (the hyperscalability of platforms effectuates the high-risk/high-reward investment strategy of venture capital funds).

Although platform capitalism operates across a wide range of geographies globally, platform firms are notably urbanized. Cities offer a range of benefits that support the production of digital technologies by platform firms. These include dense concentrations of the data and users crucial to the growth and success of platforms. Many of today's dominant platforms such as Uber, Airbnb, and Google Maps exploited urban density to expand their market share by responding to the needs and desires of city dwellers. As the Great Recession disrupted traditional career paths in banking and business, highly educated college graduates with a preference for living in cities provided a ready pool of labor for platform technology companies. Finally, city governments also turned to the technology industry as a source of economic growth and solution to urban problems in the post-2008 era, seeing tech-led innovation as a lifeline out of austerity and financial sector instability. This turn embedded the technology sector's "needs, goals, and preferences within urban governance priorities" (Rosen and Alvarez Leon 2022, 6), expanding its influence in how cities grow and change.

Platform companies today constitute a key segment of the growth machine. Understood through the lens of the growth machine, in one sense the relationship of the tech industry to the city is rather ordinary: Like any other industry, technology firms seek "to obtain favorable treatment" and "to influence policy" to advance their interests. Yet the imperative and capacity of platform companies for exponential growth is a novel aspect that makes the tech industry distinct from traditional urban elites involved in reproducing the growth machine, uniquely positioning technology firms to create desirable high-paying jobs and remake the city's built environment.

A Retrospective on San Francisco's Tech-Led Office Market Growth (2008–2020)

The growth of tech since 2008 had a profound impact on the commercial real estate market in San Francisco. Three distinct phases of growth between 2008 and 2020 can be identified: great recession and recovery (2008–2010), rise of tech office market (2011–2014), and new office development and construction (2015–2020).

Four clusters are identified within which tech offices have located over the past two decades: (1) the Financial District, (2) SoMa, (3) Mid-Market, and (4) Mission Bay. Due to the scalar imperative of platform firms, many tech companies have also moved within and between these districts over time, shaping the relational evolution of these urban spaces as tech increasingly dominates the local economy.

Office market districts and planning areas in downtown San Francisco.

Great Recession and Recovery (2008–2010)

Between 2008 and 2010, the office market in San Francisco experienced a post-economic-crisis phase, characterized by high vacancies, rising from 10.2 percent in 2008 to 17.7 percent in 2010. Financial and legal firms were the main sources of company closures that contributed to the increase in vacancies, and tech companies moved in to occupy the newly vacant space.

Rise of Tech Office Market in San Francisco (2011–2014)

Between 2011 and 2014, the office market experienced strong growth in San Francisco, particularly in and around SoMa, where vacancies almost halved over twelve months, from under 7 percent in 2011 to 3.8 percent by 2012. The decline in vacancies was accompanied by sharp increases in rents, with SoMa rents reaching $33.50 per square foot in 2011 (up to a 25 percent increase) with reports of leases being signed above asking price. Rising rents increased the attractiveness of the office market to investors, who saw the opportunity to renovate floorspace and increase rent yields. Large tech companies, such as Google, Salesforce, and Twitter, began to dominate the office market in San Francisco, absorbing large spaces and committing to long leases of ten years that would expire in 2022 and beyond. By 2013, tech tenants reportedly filled 22 percent of all occupied office floorspace in San Francisco. This growth was spatially concentrated, with tech tenants occupying 58 percent of space in SoMa, but less than 9 percent in the areas north of Market Street. The rise of the tech office market in San Francisco coincided with the rise of the "innovation complex" and "the digital growth machine" characterized by political support for the tech industry as an urban economic growth strategy.

New Office Development and Construction (2015–2020)

Vacancy rates fell even further leading up to the pandemic, hitting a floor of 3.6 percent in 2019 and floating at 4 percent in the first quarter of 2020. By comparison, the record-low vacancy rate in the dot-com era was under 1 percent. The sublet market emerged during this phase, adding complexity to vacancy and leasing statistics.

Prior to the pandemic, the office market narrative shifted primarily toward the construction of new office floorspace. Tech companies were, by and large, tenants in San Francisco, with office buildings owned by institutional investors. Silicon Valley has a much greater presence of tech companies as owner-occupiers compared to San Francisco. New construction was focused in and around the Financial District and Mission Bay.

The pandemic profoundly affected San Francisco's office market. The commercial vacancy rate increased from 5.4 percent in the final quarter of 2019 to 16.7 percent by the end of 2020, continuing to increase to 19.9 percent by the end of 2021 and 24.1 percent by the end of 2022. Increased vacancy rates are caused by cancellations of leases and subleases, and lack of lease renewals. Despite workers beginning to return to the office, such high vacancy rates reflect continued economic uncertainty for the San Francisco office market. During the fourth quarter of 2022, the market was flooded by 1.2 million square feet of sublease space made available by tech company layoffs. Upcoming lease expirations are anticipated to further contribute to increased short-term vacancy rates.

Several U.S. cities with high concentrations of tech and professional services have experienced a downturn in the commercial real estate market since 2020, but San Francisco has been feeling the effects of remote work much more strongly than other tech cities in the United States largely due to the dominance of tech employment throughout San Francisco and the wider Bay Area.

The pandemic has forced many companies to accelerate previous plans to increase remote work. This does not appear to be a shift toward entirely remote work, but rather an increase in flexibility for workers. Barrero et al. anticipated that in the longer term in the United States, 20 percent of full workdays will be undertaken from home. In the Bay Area, by the end of 2022, 33.6 percent of full-time workdays were undertaken from home. During 2021, several prominent tech companies (Uber, Facebook, Salesforce, Alphabet, and Amazon) announced a hybrid model with some form of in-person presence, anticipating many workers will spend about half their week in the office. In response to employee pushback, however, many tech companies have loosened these policies and even provided permission to some workers to be fully remote. At the end of 2022, among workers who have the ability to work from home across the United States, 32.5 percent were working in-person, 46.8 percent hybrid, and 20.7 percent entirely remote; among workers in the information industry (which includes part of the tech industry), 23.2 percent were in-person, 56.5 percent were hybrid, and 20.3 percent were entirely remote.

Despite ongoing uncertainty, the overarching market narrative is that platform tech companies will retain some form of office presence in San Francisco under a hybrid model. The implications of this hybrid model for downtown office markets remain unclear. If workers are required to be in the office on a particular day of the week or demand is higher for certain days, then businesses will need to retain sufficient floorspace to accommodate these workers. Alternatively, if companies rotate which teams are present in the office each day, they could reduce their floorspace by maximizing its use. It remains to be seen whether the COVID-19 pandemic has led to an acceleration of a previous trend of an increase in remote work, a widespread shift, or a temporary change. Uncertainty in the office market has been further compounded by changing macroeconomic conditions (especially rising interest rates), and numerous major tech companies have announced recent layoffs. While major tech companies have been scaling down their operations and rationalizing their existing office space to cut costs, the future of the city's downtown remains a policy challenge for the City and County of San Francisco. After aggressively pursuing the digital growth machine for over a decade, San Francisco now recognizes tech might not be the primary engine of the commercial market and local economy going forward. In 2023, the mayor released a new vision for downtown San Francisco that incorporates strategies such as tax incentives to attract a broad range of industries and land uses.

Although platform technology companies exercise outsized political and economic influence locally and globally, as well as increasingly in daily life, they also have a more mundane physicalized and spatialized existence within urban office markets. Rather than exercising a form of sovereignty over the urban landscape via their physical presence within cities, tech companies are embedded in the physical and built environment realities of the urban office market and dynamics of supply and demand.

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