301 Brannan St.

Part 1 of 2-part series.

SAN FRANCISCO-Late last year, Slide, the publisher of applications for social networking sites, signed on to lease the top three floors of 301 Brannan St., a 69,000-square-foot class B office building in Downtown San Francisco owned by the US arm of Amsterdam-based Breevast BV.

Although a 36,000-square-foot lease isn’t mind-blowing by any means, what is impressive is that this nearly quadrupled the size of the company’s previous 8,500-square-foot lease at 612 Howard St. This kind of exponential growth bodes well for the strength of the technology market here, and provides a glimmer of hope in what is beginning to look like a bleak 2009 for the Bay Area.

Macro-economic conditions have created a significant correction in the San Francisco real estate market, says Jay Sternberg, a senior vice president in the San Francisco office of Colliers International. “We are seeing a dramatic shift in market-wide demand as companies seek to reduce their real estate obligations.” But Sternberg continues to be amazed by the resiliency of the technology sector, noting that although—like any other sector—there have been a few layoffs, “we are seeing tremendous growth in the social networking and gaming portions of the sector.”

This particular sector—considered a big user of space in San Francisco and the Silicon Valley—was late to feel the effects of the recession, especially compared to the financial industry. Tomas Schoenberg, a senior vice president of investments at the Swig Co., a San Francisco-based private real estate investment firm, says that “New technology especially in green technologies and bio-sciences—two of the Bay Area’s major growing industries—are expected to lead the recovery and the growth of employment coming out of the current recession,” he says. “The Bay Area should benefit strongly from this trend.”

625 Second St.

Another tech company also showing growth here is Fox Interactive Media Inc., who recently expanded its presence in San Francisco’s South of Market district, as it tripled its leasehold at 625 Second St., a 140,000-square-foot converted warehouse.

However, while there is leasing strength in technology, the same cannot be said for other sectors. For example, says Sternberg, the retail sector witnessed the bankruptcy of locally based Sharper Image and Red Envelope, and more store closures and chain bankruptcies are expected to come throughout the Bay Area.

The legal sector has also been witness to bankruptcy, as seen with the Chapter 11 filing of Heller Ehrman LLP and the break-up of Thelen Reid & Priest LLP. Sternberg says that both the firms’ space is on the market on a direct basis. Heller had 225,000 square feet at Hines’ 333 Bush St., and Thelen had 140,000 square feet at 101 Second St.

Sternberg also adds that hotel occupancy rates and room rates are feeling increasing downward pressure; and the turmoil and rapid consolidation of the financial sector will add hundreds of thousands of square feet to the market in the coming quarters.

As for the industrial sector, looking ahead, uncertainty in the overall economy remains the largest concern for the market for the rest of the year. However, Mike Smith, a senior managing director of CB Richard Ellis’ Bay Area region, based in the San Francisco office, says that the sector is better prepared to react quickly to any signs of sustained economic strength.

The San Francisco apartment market is expected to maintain relatively healthy operations in 2009, according to a Marcus & Millichap report. According to the report, developers are scheduled to deliver 400 units this year, following no completions in 2008, rent growth is expected to moderate from recent years, and as far as investment goes, upside potential still exists.

Overall, the consensus is that the Bay area will not suffer as badly, and will recover faster than many markets around the country. “Given the diversity of the business community, the abundance of intellectual capital and the relatively conservative growth of our existing tenant base in the last cycle, we have developed a firm foundation upon which we will begin to grow as macro-economic conditions change,” Colliers’ Sternberg says.