MID-MARKET: VISION AND REALITY

Symbol of change

As tech transformed the city, a tax break kicked off a land rush that pumped up real estate prices while attracting top talent

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Carlos Avila Gonzalez / The Chronicle

Medical and tech professionals visiting for the Heart Rhythm Society conference convene at rooftop bar of Proper Hotel.

ABOUT THE SERIES:

To mark the end of the tax break on May 20, this Chronicle package looks at the evolution of Market Street, the impact on commercial and residential real estate, and the benefits that flowed — or didn’t — to the city and its people.

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Scott Strazzante / The Chronicle

The Board of Supervisors passed a payroll tax break in 2011 to attract Twitter and other tech firms to the Mid-Market area.

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Less than a decade ago, Mid-Market was a sleepy neighborhood of government offices and often deserted streets, far removed from San Francisco’s emerging tech industry.

“There was a lack of activity, a lack of energy — in complete contrast to what we’re experiencing today,” said Joaquin Torres, director of the city’s Office of Economic and Workforce Development.

Soon after the Board of Supervisors passed a payroll tax break in 2011 to attract Twitter and other tech companies to the neighborhood, the area became a financial powerhouse of the new economy. Mid-Market now holds the headquarters of tech giants Dolby, Square, Uber and Zen-desk. Together with Twitter, those companies are worth more than $140 billion.

While the tax break, which expires May 20, was a lure for some of Mid-Market’s modern corporate residents, other city policy changes helped draw still more companies to different areas of the city, especially South of Market and the new Transbay district — Facebook and Salesforce occupy acres of office space there.

As all these companies gathered momentum and huge amounts of capital, San Francisco became the epicenter of the new tech economy. Along with avocado toast and $4,000 rental apartments, Mid-Market became a symbol of that surge.

Companies attractive to younger employees who preferred working and living in an urban setting, as opposed to the sprawling office campuses of Silicon Valley, helped fuel the growth.

In Mid-Market alone, 10,000 new jobs were added from 2011 to 2018, for a total of 53,000 jobs in the area, Torres said. Citywide, the unemployment rate fell from 9% in 2011 to 2.6% this year, and the number of jobs grew from 543,600 in 2011 to an estimated 730,900 last year, according to state data.

The tax break “had a pretty significant impact on the Mid-Market area, especially serving as a catalyst to get Twitter,” said Colin Yasukochi, Northern California research director at real estate brokerage CBRE. “That attracted other tenants to the area.”

But the tax break was only one factor in Mid-Market’s growth, companies that moved to the area and real estate experts conclude.

Transit was a big reason: There is easy access to two BART and three Muni stations, plus plenty of bus lines and a Market Street redesigned for bicycles.

And the buildings themselves — lots of space at what were then bargain lease rates — were a draw, too.

Two of the biggest office buildings in the area — the State Compensation Insurance Fund’s 1275 Market St. and Bank of America’s data center at 1455 Market St. — were excluded from the tax break because they were still occupied when it passed.

The Insurance Fund soon moved its headquarters downtown and most of its employees to the East Bay to cut costs. Bank of America — hemorrhaging jobs after the 2008 recession — vacated about 90% of its 1 million-square-foot building by 2015.

The void was an opportunity for fast-growing Uber and Square, which replaced the bank. The more established audio pioneer Dolby relocated from Potrero Hill to the State Compensation Insurance Fund’s building. None received the tax break.

“It was a fairly limited and focused break,” said Matt Field, president of developer TMG Partners, which bought the insurance fund’s building in 2011 and sold it to Dolby a year later. “It had a fairly narrow impact.”

The old buildings were attractive to tech companies, even without a tax break, because they offered coveted historic architecture and large floor plates — spacious enough for many rows of tables for engineers and sleek cafeterias to keep them well fed. Lower costs were also a draw. Mid-Market offices went for as little as half the price of similar buildings downtown.

Zendesk, a customer service software startup, picked a historic building at the corner of Sixth and Market for its headquarters in 2011.

“The moment I saw it I completely fell in love,” Zendesk CEO Mikkel Svane wrote of the building in his 2015 book, “Startupland.” “I liked being at the crossroads of the neighborhood’s history with its turn-of-the-century architecture, its storied past and its future.”

Svane co-founded the software company in Copenhagen and would stay at the Phoenix Hotel near Mid-Market during his visits to San Francisco.

“He always had affection for the neighborhood. I think that emotional driver played into it as well,” said Tiffany Apczynski, Zendesk’s vice president of public policy and social impact. “Mikkel didn’t like the Financial District because he felt it was too cookie-cutter and didn’t quite fit the spirit of him or the company.”

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Rent was lower, and views over the city’s major thoroughfare were a big improvement compared with the desks facing brick walls at Zendesk’s old office South of Market, she said.

Those lower costs are a thing of the past. Mid-Market’s annual asking rents nearly tripled from $26 per square foot in 2011 to more than $73 per square foot last year. Mid-Market’s vacancy rate plunged from more than 20% in 2011 — twice the average of downtown — to below 6% today, according to real estate brokerage Cushman & Wakefield. Mid-Market is now only slightly less expensive than downtown.

“Mid-Market was an ideal location,” said Sarah Nahm, CEO of recruiting software maker Lever, citing the proximity to BART and central location. “Being able to hire people who live in all parts of the Bay Area is a huge advantage in growing your company.”

Lever received the tax break for a single year, but it wasn’t a major factor, Nahm said.

“We didn’t claim the tax break for a year or two,” she said. “We came because of public transit.”

Lever, which eventually left Mid-Market after outgrowing its subleased space, moved last year to Fifth Street in SoMa.

“Finding office space in San Francisco is more difficult than finding venture capital,” Nahm said. “I would have loved to stay on Market Street.”

In 2019, Mid-Market stands as one of the preeminent tech hubs in the region, a significant change compared with just a few years ago, said Robert Sammons, Northwest research director at brokerage Cushman & Wakefield.

“No one really knew or understood back in 2010 or 2011 just the scale of what would happen,” he said.

While street challenges and safety concerns haven’t gone away, major tenants are no longer fleeing Mid-Market despite the end of the tax break.

“Today, it doesn’t seem to matter anymore,” he said. “Tenants — they’re here because the talent is here.”

Roland Li is a Chronicle staff writer. Email: roland.li@sfchronicle.com Twitter: @rolandlisf

ONLINE: Read all of the stories, with additional photos and video: www.sfchronicle.com/mid-market

PODCAST: Hear Chronicle reporters discuss the changes around Mid-Market: www.sfchronicle.com/fifth