Part 2 of 2

SAN FRANCISCO—In part one of this two-part interview with Paula S. Crow, new partner at Sedgwick LLP, who will focus on the real estate and finance practice in the firm's San Francisco office, she talked about the local market being extremely strong and there are no apparent dark clouds on the horizon from a demand standpoint. In part two, she talks about tech employees, the biggest risk to this continued growth, and the housing crisis, noting that the very large cohort of tech employees who are under 40 have made it very clear they are not interested in suburban life.

“This is the group that is the true driver of San Francisco commercial real estate,” she tells GlobeSt.com. “The desirability of this group to tech employers has spurred more net absorption of commercial space in San Francisco and more construction cranes across the expanding business district than the City has seen since the mid-1980s.”

Average asking rents, she says, are now exceeding $60 per square foot. “By the end of the year San Francisco is expected to be the most expensive commercial real estate market in the nation.”

The biggest risk to this continued growth is not demand but supply, she explains. “Interest rates have risen some and will inevitably continue to go up. But this is not the biggest risk to sustained growth. Most of the tech companies have plenty of cash and will continue to have access to the public capital markets to raise more. If need be they will build for their own use in San Francisco as they so often have done, and continue to do, in Silicon Valley.”

Rather, growth is threatened by the region's inability to continue to support this level of development, she says. “Proposition M, passed in1985, puts an annual cap on new commercial development in San Francisco and is expected to be triggered (for the first time since the dot-com boom) this year or next, given the total square footage of new development applications currently in process. Prop M would impose a cap of 875,000 square feet per year on new office building development.”

The City Planning Department believes that between pending and pre-application projects there is more than 11 million square feet in the development pipeline, she notes “After applying the total of annual cap amounts that have rolled over since Prop M was last applied to limit development, the Planning Department thinks there is negative cap availability of more than 9 million square feet.”