Part 2: Why Santa Cruz? Room to Grow - Office Space and Wages
This week, backed by an amazing amount of in-depth research and impeccably reported by Leonardo Castañeda, The Mercury News dropped the truth bomb that just 10 entities own about 11% of all the taxable property in Silicon Valley—that’s $59.2 billion of property. The top three owners? Unsurprisingly: Stanford, Apple, and Google.
We don’t need to get into the weeds examining this conglomerative effect on the housing market and cost of living (because entire books are being written on this complex subject). And we’ll not point moralistic fingers or pass judgement on these owning entities. But when 10 companies—more accurately, nine corporations and one non-profit educational institution—set the groundwork for the commercial real estate market, and those entities are among the highest valued corporations on the planet, it doesn’t take an economist to deduce that entering the region as a newcomer is intimidating at best, impossible at worst.
Meanwhile, in San Francisco: in late October, when Stripe announced its departure from San Francisco because of “the scarcity and skyrocketing cost of available office space,” it’s hard to believe anyone was surprised. Stripe’s $35 billion pre-IPO valuation ranks it as the third most valuable start-up in the country. Stripe will be joining the likes of Genentech, Cytokinetics Inc., and a strong showing of other biotech companies in “the industrial city,” as the unmissable hillside sign now justifiably proclaims.
Yes, it’s just a move of about 10 miles. But it’s South San Francisco. Not Palo Alto, not San Jose, not even Emeryville. Glamourous? Not so much. Smart business sense? Absolutely. It turns out that taxes and zoning restrictions in The Industrial City are much friendlier to these corporations (notably, the Prop C homelessness assistance tax, which Stripe very publicly thumbs-downed last year).
While how much Stripe will be paying for their new space at Oyster Point is not yet public knowledge, their soon-to-be neighbor Cytokinetics pays about $65.40 per square foot. It’s possible to find a rentable office space in downtown Santa Cruz starting at $1.75 per square foot, and bigger spaces for not much more.
Above: the Riordan Melrose Building in Downtown Santa Cruz, which is rentable for $2 per square foot on a 3-year lease.
Spatial Reasoning
Last week, we looked at the more human side of doing business in Santa Cruz, so this week we’ll look at some hard numbers—particularly, hard costs that companies need to address at the very birth of their company. Start-up costs are numerous, but one of the biggest costs, particularly for tech companies, is office space.
The numbers speak for themselves: In the office space market, year-over-year rent growth in Santa Cruz sits just below a cozy 2%. San Francisco's YOY rent growth bumped up to almost 5%, and San Jose leads the way (but remember, this is “golf scoring”) with a full 5% growth trend as of the end of Q3 this year.
Since the peak of the last cycle (and, oh, what a cycle it was), office rents in the San Francisco metro area climbed 80%—131% within the tech epicenter of MidMarket. San Jose metro increased 61%, and even downtown Oakland showed a whopping 95% rent growth rate. Santa Cruz metro area rent growth decreased by 1.3% since that cycle peak; in downtown Santa Cruz, rents inched up a mere 0.8%.
We’d be remiss not to mention that office space availability in Santa Cruz pales in comparison to the vacant square footage “over the hill.” Santa Cruz only possess a handful of spaces over 10,000 square feet, with about a 4.5% overall vacancy rate. San Francisco’s office vacancy rate is 6.2%; San Jose, 8.1%.†
Yet many Bay Area start-ups* are renting more office space than they need and can afford, and signing longer leases than might be wise.
And here’s some perspective on that vacancy rate: San Francisco office sales reached just over $10 billion in 2019. In Silicon Valley: $9 billion. Santa Cruz: about $55 million.
Comparing Wages
Wages are a touchy subject, but vital to look at. Median annual wages in Santa Cruz County are significantly lower than those in Silicon Valley and San Francisco—and while this initially rings danger bells, the cost of living in Santa Cruz is still lower than over the hill; hard to believe, but true. (But that cost is indeed burdensome for many, and we’ll look much deeper into cost and quality of living in another week of this series.)
According to Hired’s State of Salaries 2019 report, the average wage in the San Francisco Bay Area has increased by 2% to $145,000—falling below the 4% increase in the region’s cost of living, as calculated by the Bureau of Labor Statistics for 2018 to 2019. According to Monterey Bay Economic Partnership data, the mean wage of Santa Cruz workers in the “computer and mathematics” industry was $94,374 in 2018 (Monterey boasted a slightly higher figure at $98,226). For a new small start-up, this means a lot. Payroll is an enormous portion of a company’s cost.
Some analysts believe that Silicon Valley wages have maxed out in comparison to nation-wide inflation and skyrocketing cost of living.** Santa Cruz has room to grow. Could it be that the cost of living in Silicon Valley and San Francisco is growing so exponentially that slightly increasing wages just aren’t cutting it?
Putting It into Perspective
There’s another, somewhat unspoken factor in business costs: employee happiness. Last week, we looked at all the ways Santa Cruz culture supports happy, engaged employees and therefore successful workplaces—yes, happiness matters even for software engineers. It’s unwise to eliminate the cost of happiness from a business model, but so many Silicon Valley companies are only now picking up on this aspect of business success.
Even the increasingly insane commutes in Silicon Valley, San Francisco, and the East Bay are inextricably tied to the cost of doing business—employees arriving fatigued and aggravated, late because of traffic disasters, and distracted as they try to navigate a shortened home life due to a longer commute. As more people bemoan the very real and very negative physical and mental impacts of a stressful (and potentially fatal) commute, tech giants try to mitigate the negative effects by providing company shuttles and work-from-home arrangements. But for most companies, a chartered bus is an inaccessible expense—not to mention a target for rocks and protests.
So, yes: the cost of business is Santa Cruz is high when compared to other locales around the country and the world. But compared to Silicon Valley and San Francisco, even the East Bay, Santa Cruz is still an oasis. It’s a matter of perspective. An 8.1% vacancy rate could sound like opportunity, but when those available offices rent for a small fortune, are many times larger than a company needs, come with 15-year leases, and require a miserable hour-long commute, that “opportunity” starts to sound a little more like a trap.
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Comments by Santa Cruz Works: for more details about the Santa Cruz housing and office space issues, see Bonnie Lipscomb Presentation and Bonnie Lipscomb video
† The data in these paragraphs come from in-depth reports on Bay Area and Santa Cruz market trends by CoStar Market Analytics. All figures reported as of the end of Q3 2019.
*An important and possibly controversial note about defining the “San Francisco Bay Area”: As powerful as Santa Cruz is as a cultural and tech powerhouse, even with its deeply rooted connections and relationships with Silicon Valley, Santa Cruz County does not fall in the historical and established San Francisco Bay Area nine-county definition. Many governmental agencies that oversee goings-on in San Francisco, the East Bay, and Santa Clara County do not extend into Santa Cruz County. Some models include Santa Cruz County in an 11-county map of the “Bay Area,” but the mountains that divide it from Santa Clara County. For this reason, Santa Cruz has more often been considered part of the Monterey Bay economic block, though recent years may be indicating a shift in this perspective.
**Read the full, fascinating study here—spearheaded by Chris Benner and other researchers at UC Santa Cruz, by the way!
Part 1: Lifestyle + Business Sense
Part 2: Room to Grow: Office Space and Wages
Part 3: Housing and Homelessness
Part 4: A Unique Tech Ecosystem
Part 5: Where Do We Go from Here
Photo by Liz Birnbaum / The Curated Feast
Julia Sinn is a freelance writer and editor, brand messaging consultant, event designer, and project manager. Read more of her work and connect with her at juliarosesinn.com.