Ritchie: The boom and bust cycles of Silicon Valley

I am honored to make my first contribution to San José Spotlight. My name is Mark Ritchie, I am the second-generation owner of regional commercial real estate brokerage firm Ritchie Commercial. We are the last privately owned regional commercial real estate service company in the Bay Area. I live and work in both San Jose and San Francisco, and am a fifth-generation SF native. I see a lot in both cities on a daily basis and have the odometer reading to prove it.

We have entered a period in the commercial real estate economy that is breaking all records, especially in San Francisco proper. The endless “doom loop” editorials and articles in local and national media about the Bay Area are read far and wide, and relished by many in non-coastal regions. Statistically, it’s very much cause for alarm and we are seeing a near value destruction on the most damaged post-pandemic breed: high-rise office buildings in downtown San Francisco.

The first true large high-rise office sale at 350 California Street is coming in at an 80% reduction in pricing versus pre-pandemic in 2019. Office vacancy rates in San Francisco have surpassed any historic level at over 30%, Silicon Valley at 20% and rising. The Valley is faring generally better as the building base and population distribution is much more diverse than San Francisco, especially the financial district.

We have seen dramatic boom and bust cycles in the Bay Area since the first miner panned for gold in 1849. Most other major regions in the U.S. do not see such extremes. It is the price we pay for the highs as the place in this country that still towers over all others looking at any of the statistics related to the knowledge and innovation economy that we are.

Comparing the greater Bay Area to greater New York City, the Bay Area received 40% of all venture capital investment in the U.S. in 2021, while New York received 16%, according to data from the National Venture Capital Association and PitchBook. That same year, the Bay Area accounted for 24% of all tech start-ups in the U.S., compared to 13% in New York. In 2020, 12.8% of all patents granted in the U.S. came from the Bay Area, compared to 9.4% from New York, according to data from the United States Patent and Trademark Office.

We are in a boom loop in the Bay Area. Each boom has created more jobs and innovation than the last. Each boom has had different sources within new technology. Each bust finds a different set of solutions. We will find solutions for this office building bust, remote work has likely nearly reached its limits. Industrial and apartments are holding steady. Retail health is mostly a function of how far removed you are from the three main downtown cores of San Francisco, San Jose and Oakland to capture more of the work from home army. Neighborhood retail is making a huge comeback in places such as North Beach in San Francisco or Valley Fair and Santana Row in San Jose, which doubles as neighborhood retail Silicon Valley-style.

The latest lists of the top 25 artificial intelligence firms and venture investments from the Business Times reveals that this new source of technology and related hires and innovations are almost entirely based in the Bay Area. Artificial intelligence/machine learning, self-driving tech and plant-based meat are three catalysts that will change the shape of the built environment globally and effectively change the way humans interact into the future.

We are making slow progress on homeless issues and likely coming to grasps with legal changes needed to care for the mentally ill on our streets. In spite of the feverish reports, violent crime has actually declined in the Bay Area. Property crime is increasing, and hitting the fentanyl crisis head on will shift that over time.

The next boom will come, but the two to three years to get there will be tough. Anyone who has counted the Bay Area and Silicon Valley out in the past has been proven dead wrong.

San José Spotlight columnist Mark Ritchie is the owner of commercial real estate brokerage firm Ritchie Commercial, and has spent his entire career in commercial real estate. His columns appear every second Wednesday of the month. Contact Mark at [email protected].