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Dot-coms Back on the Map: Charting the Rise of 'Web 2.0' in S.F.

By J.K. Dineen
San Francisco Business Times
October 20, 2006

The dot-com map is back.

At the height of the Internet frenzy, Mike Brown and Bill Benton made a name for themselves as the TekWork Team -- brash young commercial real estate brokers riding the Internet wave with record-setting deals, raucous networking parties and a famous map showing how the tech explosion was transforming the city's office landscape.

Now five years later, as so-called Web 2.0 gains momentum, Brown and Benton -- now managing partners at Newmark Knight Frank -- have resurrected not only the monthly tech soirees but also the map, which shows the forest of technology startups and survivors supporting San Francisco's office market recovery.

And even for those who have been following the city's tech revival, the number of young companies on the map is surprising: About 275 technology companies have taken root, mostly South of Market and along Market Street.

Benton said the map, which was created by Newmark broker Roman Adler, enables young companies to see where their peers are going at a time when the city's tech community is digesting Google's $1.6 billion all-stock acquisition of San Bruno-based YouTube, a company with just 65 employees.

"The overriding thing is that what just happened with YouTube has a lot of these young companies extremely excited," said Benton.

Benton's tech networking party at Hotel Vitale last week lured about 40 venture capitalists and young company founders, more than double the number who attended when the duo started holding the events again last spring.

Driving the recovery

The map may be unscientific, but it confirms the trend that brokers have been observing over the past year. During the first three quarters of 2006, 113 technology companies absorbed 1.5 million square feet in San Francisco. That is 32.6 percent of all leasing activity in the city, and already 400,000 square feet more than all of last year, according to research by Grubb & Ellis. In addition, in the first half of 2006, venture capitalists pumped $262 million into Web 2.0 companies, which are transforming the Internet from a collection of sites to a full-fledged computing platform. About $50 million of that $262 million went to San Francisco companies, according to a new study by Dow Jones Venture One.

Over the past three years, tech companies have absorbed 3.2 million square feet in San Francisco. Daniel Cressman, managing partner of Grubb & Ellis, said most of the companies are "young and nimble and not in the yellow pages." A lot of them are survivors of the last go-round.

"They have a little more experience and some of them even have gray hair," he said.

The map shows a heavy concentration of companies in the same buildings as during the last boom. South Park has about 40 companies, 303 Second St. has 11 companies, and China Basin has 14 companies, including two -- Level 3 Communications and Lawson Software -- that are on both the dot-com map and the Web 2.0 map. Eight companies are in 123 Townsend St. In general, companies seem more interested in Market Street and commodity space in the North financial district, and thus far neighborhoods farthest from BART and underground Muni -- Potrero Hill for example -- have not attracted as many firms.

Companies on Market Street, between Second and Fourth streets, include Adbrite, Opentable, On 24, Topica and Stepup.com (acquired by Intuit in September for $60 million in cash). But generally, the new companies are still drawn to brick-and-timber SoMa spaces, so many of which were renovated at great expense by doomed dot-coms.

"They all still love being next to each other, they all still love the open environment and being in creative space," said Benton. "But they are not putting cool space above profits."

This time it's different

Unlike the 1999-2000 bubble, the current tech upswing has been characterized by conservative real estate decisions. Even well-capitalized companies like Snocap and Ingenio are taking only as much space as they need. The new wave of tech firms are willing to "trade a buck or two in rent to have the flexibility of a termination clause," Benton said.

"They are being cautious across the board," he said. "They all want built-out space. None of these guys want to spend any money on (tenant improvements). They are looking for one to three years. They want to be able to pop in and pop out without disruptions."

Patty Breslin, director of analytics at tenant representative firm Studley and a mentor at the Women's Technology Cluster, said, "there is no question that there is a renewed enthusiasm and interest in the technology community and that there are lots of new companies in the city." But she said the number of companies receiving VC funding is about a third of what it was in 1999. In 1999, 229 tech-related, VC-backed companies started in San Francisco. In the current cycle, that number is 77.

Studley branch manager Kevin Brennan said unlike in 1999, companies with 50 employees are not taking enough space for 250 workers.

Brennan said the tech expansion might fuel "micro-spikes in select submarkets" but nothing like the fall of 1999, when startups like Organic Online jumped from 30,000 to 200,000 square feet. Video Egg, which recently received $15 million in funding, is going from 5,000 square feet to 15,000. Ingenio, which is expecting revenue to increase to $122 million this year from $80 million last year, just signed a deal to jump from 19,000 square feet at 100 California St. to 38,000 square feet at 201 California St.

"Ingenio is making a ton of dough, their rent is in the $30s and did a five-year lease," said Brennan of the pay-per-call service. "That is pretty responsible real estate."

Cressman said the more conservative deals seem to "bode well for the market."

"This time, we're seeing tech companies that actually have employees to fill that space they lease," said Cressman. "So far, I haven't seen anyone trying to sell dog food over the Internet."

More to come

While tech companies have gobbled up 3.6 million square feet since 2004, the trend seems unlikely to slow any time soon. Tech companies are in the market for about 800,000 square feet, including Google, which is looking for 100,000 square feet, according to report by the CAC Group.

But most of the companies searching for office space are more like Palo Alto-based Imeem, a social media web site where people can share a wide variety of video and music content. Imeem is looking for about 11,000 square feet South of Market for its 21 workers, according to company founder Jan Jannink. He said the company, which recently raised additional funding, is likely to double the number of workers in the next year. About half of Imeem's staff lives in the San Francisco and space in SoMa is cheaper than downtown Palo Alto.

Breslin said the fundamental motivating philosophy has changed this time around.

"These companies are not looking for an IPO exit strategy, it's an acquisition exit strategy," she said. "They are trying to be nimble and small and develop smart technology so somebody will come in and pay them a billion dollars."

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