StartupHQ—the new owners of 156 Second St. in San Francisco’s SoMa neighborhood—is throwing an ''SF Is Back'' party this Friday that’s meant to function as a kind of open-bar open house.
The company, which owns, manages and operates office space for startups, has taken advantage of a local “Doom Scoop” trend line where cratering real estate values have presented great deals for those betting on the city’s eventual recovery.
Earlier this summer, StartupHQ bought the 34,000-square-foot building for $6 million from a Canadian investor who paid more than twice that for it back in 2012, according to property records.
But there was a reason for the discount. The century-old property located a block away from Salesforce Park was completely vacant after troubled coworking startup WeWork shuttered its offices there during the pandemic.
StartupHQ co-founders Steve Weir and Bardia Housman remain confident. Weir said they are following a similar playbook as the one they started the company with in 2011 at the tail end of the Great Financial Crisis.
Back then, the duo purchased two buildings in SoMa partly with the proceeds from their own startups and created the shared office concept via trial and error. Those properties are nearly fully leased, according to Weir.
Alexander Quinn, the director of research for Northern California real estate firm JLL, said there are some indications that the market for commercial property valuations is nearing its floor.
“Usually, it’s those moments of crisis when you can pick up properties at a lower basis, wait it out and make significant returns,” Quinn said. “Most building owners make their money not at the peak of the economy, but at the bottom.”
Not everyone is well-positioned to take advantage of those markdowns, however. Concerns about record office vacancies in the wake of the shift to remote work in San Francisco, along with higher interest rates, mean that banks have a drastically lower appetite for commercial real estate deals.
So primarily cash buyers can take advantage of real estate deals in the current market, said Weir. The fact that few buildings are trading hands also means there aren’t many deals to guide valuations.
In a tweet in mid-July, Andrew Brackin, a tech entrepreneur and friend of Weir’s, touted the property’s purchase “at an insane price” and added that it would create a new hub for tech events and “be able to offer space for a steal” for entrepreneurship.
AI entrepreneurs, for example, “want the community and energy that exists here,” Brackin said in an interview.
Elon Musk also weighed in: “SF will rebound bigtime if the people manifest their will to make it happen.”
There are few tech figures that loom larger in the industry than Musk, despite his love-hate relationship with San Francisco. The viral tweet helped the company ink its first startup tenant and kicked off a wave of interest in touring the space.
On a recent weekday morning, laborers were rapidly working to get offices ready, but Weir said the interior was already much improved from just a few weeks ago, when the windows were caked with dust.
StartupHQ plans to put around $1 million into the property for new fixtures, infrastructure upgrades and cosmetic improvements with the idea of creating 131 offices of various sizes.
“It’s somewhat like we’re buying a loss-making business and we’re going to turn it around," Weir said. "The upside is higher, but so is the risk."
Some green shoots have started to emerge, led in large part by the hype around AI, after years of negative signs. Demand for office space in the city grew 10% in the second quarter based on touring data from commercial real estate data firm VTS, and a number of AI companies have inked leases in San Francisco in recent weeks, including Hive AI, Hayden AI and Anthropic.
There are currently more than 10 big AI companies looking for office space in addition to smaller startups.
If AI growth continues, Quinn from JLL is forecasting demand for office space in San Francisco to reach around 14 million square feet by 2030. He believes the city is on track to continue the 30% growth rate in 2023.
Quinn said AI is poised to surpass the internet industry in terms of economic growth.
San Francisco is considered the AI industry’s national headquarters, and Weir said about half of the companies StartupHQ is considering leasing space to focus on AI.
Many early AI startups gravitated toward the city’s Mission District. But more recently, companies are looking farther afield. Roughly 75% of the AI leases since 2022 have been in SoMa or the South Financial District, according to a report from real estate company Newmark.
Weir said demand for the commercial real estate market in San Francisco is between super high-end, high-quality space requiring top-dollar rents and flexible smaller spaces that are cheap enough for cost-conscious early-stage companies to consider.
Last year, StartupHQ paid $12.5 million for 550 Third St., a 20,000- square- foot building in the South Park neighborhood, with the idea of turning it into a top- flight space.
“Where we went wrong in the cycle is that we only got two buildings,” Weir said. The firm aims to own at least five properties, which helps with economies of scale for management and maintenance.
Plans for the South Park building include the addition of a roof deck and penthouse and a bar with outdoor seating in addition to extensive renovations of the interior.
Weir said the group has also signed up new partners from the tech investing world, in part to help them scout prospective tenants. That doesn’t mean the steady stream of negative news about San Francisco doesn’t give him heartburn at times.
“Even with us having gone through the cycle, knowing our stuff, having front-line communication with startup investors, my heart still pops out of my chest often,” he said.
But Weir, who moved to the Bay Area in 2006 from New Zealand, believes in San Francisco and its ability to reinvent itself.
“San Francisco is still the center of the technology world,” he said.
Kevin Truong can be reached at email@example.com