San Francisco is known as the tech capital of the U.S. A majority of the most well-funded startups are based in and around the city, and have been for decades. Office space here is in such demand that the vacancy rate is a mere 6.4%/year. As a result, many developers solely build office space in order to keep up with demand. In an effort to limit the amount of office space, in case of an economic recession where large tech companies go bust, the civilians of the city approved Proposition M in 1986. This proposition was passed to limit the amount of office space allowed to be built to 950,000 sqft/year; with any amount not completed in that year to be rolled over to the following year.

The proposition divides the 950k sqft allotted each year between two different tiers: small projects between 25-50k sqft, and projects > 50k sqft. This levels the playing field for smaller developers to build their projects in a city where big players dominate. There are currently bids for 6mm sqft to be built in the city, well above the 2mm reserve the city has. By reserving a sectioned amount for smaller projects (25-50k sqft), the city removes the possibility of an oligopoly in the market. 

This is great news for hard money borrowers and lenders. Most private lenders cap their loans at ~$15M which is applicable to the smaller projects, but inapplicable to many of the larger ones. Our analysts here at Scout recommend lenders to focus on the San Francisco office market. It’s a great space for borrowers due to the lack of supply with such a strong demand from venture capital-backed companies. The risk is extremely low for lenders, which allows them to issue capital below market rates. It’s the perfect combination.

 

Source:

https://www.wsj.com/articles/san-francisco-limits-office-space-thats-a-problem-for-tech-firms-11557835340