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This is a great analysis and the argument makes perfect sense in every respect. The only thing I find dubious is the idea that the bust is 2-4 years out. I th

This is a great analysis and the argument makes perfect sense in every respect. The only thing I find dubious is the idea that the bust is 2-4 years out. I think if you polled most SF commercial landlords, they would tell you that they expect most of their startup tenants to start having difficulty paying the rent in no more than 18 months. It would be interesting to see some actual data on this. After all, there's not much benefit to demanding 5-year leases if you think that (a) prices are going to keep going up for 3 or 4 more years, and (b) your tenants are mostly going to be solvent for at least that long. If the landlords really believed the bust were 3 or 4 years out, given the sub-sub-sublease problem, they'd take startups on 1-year terms at a MUCH higher rate than established tenants who could negotiate modest discounts on longer-term leases. The evidence presented suggests rather strongly that most landlords don't expect these startups to be in business in 2 years, and I agree.

pavel_lishin 11y ago
I think that horizon was meant to be in general, not on a per-startup basis. If any given start up fails in 12 months (expected), the space can be sub-leased to someone else - but they expect this scenario to only be the case for another few years.
- fredkbloggs 11y ago
  Yeah but if they're really remembering 2000, they know that's not so. There's always going to be some nonzero attrition rate among startups, but once a bust is under way the door slams shut on all of them at once. I'm saying I think (and think that landlords also think) that the door is going to slam shut in 12-18 months (maybe even less), not 36 or 48.
ChuckMcM 11y ago
Agreed, many landlords seem to feel like the trouble is a mere few months away, although often any attempt at getting them to discuss how they arrived at that conclusion gets something like "I just know it." So one wonders about the whole "wisdom of the crowds" or "herd" in this case, and whether or not they can sense something that isn't showing up in other indicators. I've been looking but other than the extensively covered late stage valuation madness I've not found good correlation for this feeling.
- nostrademons 11y ago
  A lot of this may come from the belief that the economy is only being propped up by the easy money policies of the Fed, and that the Fed is going to start tightening rapidly in the fall. There's a sense that once the tightening starts, everyone will run for the exits at once, and we'll have another 2008 situation but worse.
  - ffreire 11y ago
    Your response coupled with your username gave me a shiver, heh. That said, why would the Fed tighten money in the fall when we're so close to an election year? I know they hold longer terms to hopefully avoid political swings, but, it just seems like bad timing.
    - nostrademons 11y ago
      Well, if the Fed doesn't tighten, they're at a pretty high risk of introducing serious inflation into the economy. The high commercial rents are a form of inflation; so are the wages of tech workers, and people being priced out of the Bay Area. So far, this is local to a few industries and metropolitan areas, but if the Fed doesn't act you could see it start showing up in nationwide statistics. That said, I'm not entirely convinced Yellen will tighten. She has a reputation as a dove on monetary policy and seems weak to me, overly afraid of the effect her actions will have on the stock market. It wouldn't surprise me if we end up with another 1997 situation, where some temporary economic instability makes the Fed put off tightening or even introduce additional stimulus, and this ignites a speculative bubble that raises prices beyond all reason and then bursts. (The username is ancient, I've had it on various sites since college, and while I'd love to be thought of as a prophet, my track record isn't that good.)
      - _delirium 11y ago
        On a nationwide scale, the oil-price crash is adding some offsetting economic slowdown (since the U.S. is a huge oil producer) which I think significantly reduces inflation risk. The previously booming energy sector is stalling and moving towards a contraction: reducing investments, laying off employees, etc. SF rents are going up, but Houston rents are going down. The overall engineering employment market is also getting slightly less tight as petroleum engineering is no longer sucking up every ounce of spare talent. Plus just in terms of the benchmarks they watch: The headline CPI is currently at a miniscule 0.1%, way below the 2.0% target. The personal-consumption-expenditures (PCE) rate is somewhat higher at 1.3%, but still below the target.
novaleaf 11y ago
Based on the title, I expected this to be an article ranting about how someone thought their startup was being discriminated against. Surprised that was, dare I say, "fair and balanced".
- keithpeter 11y ago
  The company that produced the post needs to understand the actual reasoning behind the local market for their business to be successful so no room for ranting I'd imagine. What interested me was the way that in this discussion, each of the separate reasons for the landlords being reluctant to rent to start-ups has been discussed separately - analysis - where what the landlords are doing is making a synthesis.
ww520 11y ago
It's not that the bust is coming soon. Startups are notoriously bad tenants as a class, whose life cycle is too short. Signing long lease with them just doesn't make sense. By definition a startup is an experiment to build products and a business in a short amount of time, with one to two years of funding in most cases. 9 out of 10 these experiments fail, so 9 out 10 startup tenants will move out after a short time. Commercial landlords want long term tenants, not people going out of business in one or two years. Commercial lease is really only applied to companies that can stay in business. A long lease is often not enforceable. The incorporated company simply declares bankruptcy and it's hard to collect the money on the full term of the lease. I remember in the Dot Com bust days some failing startups simply stopped paying rents but stayed on, to stretch that last dollar or to burn out that security deposit.
- superuser2 11y ago
  Even if it doesn't fail and turns into a unicorn, its space needs will rapidly increase and it will still want to move on to bigger and better offices. The entire point of a startup is to not stay its current size - either it will grow wildly or disappear altogether. If you can comfortably occupy the same amount of space for 2+ years, you're not a startup, you're a small business.
  - ww520 11y ago
    Exactly. Either way they don't stay long. Landlords have learned the hard lesson over the years.
  - samstave 11y ago
    I picture Ron Conways game of life as a view of office space use in SF :)
    - cglace 11y ago
      Did you mean John Conway or were you making a joke?
  - Mikushi 11y ago
kijin 11y ago
According to the article, landlords expect economic cycles to last 7-10 years, and the last bust was in late 2008. So the next bust can be expected to occur somewhere between late 2015 and late 2018. It's already close to late 2015, so the halfpoint of the predicted period is only 18-21 months away. That fits your observation that landlords expect the bust to be less than 18 months away.
jane_is_here 11y ago
A relative of mine made the mistake of renting to a start up. Rent has not been paid for several months. Legal proceedings have started. ( This is in a country where evicting tenants is notoriously difficult. )
- adebtlawyer 11y ago
  What country is that? Sure isn't the U.S.

pavel_lishin 11y ago

I think that horizon was meant to be in general, not on a per-startup basis. If any given start up fails in 12 months (expected), the space can be sub-leased to someone else - but they expect this scenario to only be the case for another few years.

fredkbloggs 11y ago
Yeah but if they're really remembering 2000, they know that's not so. There's always going to be some nonzero attrition rate among startups, but once a bust is under way the door slams shut on all of them at once. I'm saying I think (and think that landlords also think) that the door is going to slam shut in 12-18 months (maybe even less), not 36 or 48.

ChuckMcM 11y ago

Agreed, many landlords seem to feel like the trouble is a mere few months away, although often any attempt at getting them to discuss how they arrived at that conclusion gets something like "I just know it." So one wonders about the whole "wisdom of the crowds" or "herd" in this case, and whether or not they can sense something that isn't showing up in other indicators. I've been looking but other than the extensively covered late stage valuation madness I've not found good correlation for this feeling.

nostrademons 11y ago
A lot of this may come from the belief that the economy is only being propped up by the easy money policies of the Fed, and that the Fed is going to start tightening rapidly in the fall. There's a sense that once the tightening starts, everyone will run for the exits at once, and we'll have another 2008 situation but worse.
- ffreire 11y ago
  Your response coupled with your username gave me a shiver, heh. That said, why would the Fed tighten money in the fall when we're so close to an election year? I know they hold longer terms to hopefully avoid political swings, but, it just seems like bad timing.
  - nostrademons 11y ago
    Well, if the Fed doesn't tighten, they're at a pretty high risk of introducing serious inflation into the economy. The high commercial rents are a form of inflation; so are the wages of tech workers, and people being priced out of the Bay Area. So far, this is local to a few industries and metropolitan areas, but if the Fed doesn't act you could see it start showing up in nationwide statistics. That said, I'm not entirely convinced Yellen will tighten. She has a reputation as a dove on monetary policy and seems weak to me, overly afraid of the effect her actions will have on the stock market. It wouldn't surprise me if we end up with another 1997 situation, where some temporary economic instability makes the Fed put off tightening or even introduce additional stimulus, and this ignites a speculative bubble that raises prices beyond all reason and then bursts. (The username is ancient, I've had it on various sites since college, and while I'd love to be thought of as a prophet, my track record isn't that good.)
    - _delirium 11y ago
      On a nationwide scale, the oil-price crash is adding some offsetting economic slowdown (since the U.S. is a huge oil producer) which I think significantly reduces inflation risk. The previously booming energy sector is stalling and moving towards a contraction: reducing investments, laying off employees, etc. SF rents are going up, but Houston rents are going down. The overall engineering employment market is also getting slightly less tight as petroleum engineering is no longer sucking up every ounce of spare talent. Plus just in terms of the benchmarks they watch: The headline CPI is currently at a miniscule 0.1%, way below the 2.0% target. The personal-consumption-expenditures (PCE) rate is somewhat higher at 1.3%, but still below the target.

novaleaf 11y ago

Based on the title, I expected this to be an article ranting about how someone thought their startup was being discriminated against. Surprised that was, dare I say, "fair and balanced".

keithpeter 11y ago
The company that produced the post needs to understand the actual reasoning behind the local market for their business to be successful so no room for ranting I'd imagine. What interested me was the way that in this discussion, each of the separate reasons for the landlords being reluctant to rent to start-ups has been discussed separately - analysis - where what the landlords are doing is making a synthesis.

ww520 11y ago

It's not that the bust is coming soon. Startups are notoriously bad tenants as a class, whose life cycle is too short. Signing long lease with them just doesn't make sense. By definition a startup is an experiment to build products and a business in a short amount of time, with one to two years of funding in most cases. 9 out of 10 these experiments fail, so 9 out 10 startup tenants will move out after a short time. Commercial landlords want long term tenants, not people going out of business in one or two years. Commercial lease is really only applied to companies that can stay in business. A long lease is often not enforceable. The incorporated company simply declares bankruptcy and it's hard to collect the money on the full term of the lease. I remember in the Dot Com bust days some failing startups simply stopped paying rents but stayed on, to stretch that last dollar or to burn out that security deposit.

superuser2 11y ago
Even if it doesn't fail and turns into a unicorn, its space needs will rapidly increase and it will still want to move on to bigger and better offices. The entire point of a startup is to not stay its current size - either it will grow wildly or disappear altogether. If you can comfortably occupy the same amount of space for 2+ years, you're not a startup, you're a small business.
- ww520 11y ago
  Exactly. Either way they don't stay long. Landlords have learned the hard lesson over the years.
- samstave 11y ago
  I picture Ron Conways game of life as a view of office space use in SF :)
  - cglace 11y ago
    Did you mean John Conway or were you making a joke?
- Mikushi 11y ago

kijin 11y ago

According to the article, landlords expect economic cycles to last 7-10 years, and the last bust was in late 2008. So the next bust can be expected to occur somewhere between late 2015 and late 2018. It's already close to late 2015, so the halfpoint of the predicted period is only 18-21 months away. That fits your observation that landlords expect the bust to be less than 18 months away.

jane_is_here 11y ago

A relative of mine made the mistake of renting to a start up. Rent has not been paid for several months. Legal proceedings have started. ( This is in a country where evicting tenants is notoriously difficult. )

adebtlawyer 11y ago
What country is that? Sure isn't the U.S.