Commerical Real Estate in Silicon Valley
Technology seems to be winning the race once again in Silicon Valley, California. From tiny start-ups to monsters like Google, technological firms are once again rushing to get bigger, triggering a u-turn in the Silicon Valley commercial real estate market that seemed all but dead not too long ago.
The sum of unavailable office space grew by three-million square feet just a few years ago; the largest one-year increase since 1999, according to established firms like Jones-Lang LaSalle Inc. Downtown Palo Alto rents, a very highly sought after market, shot up 25% while the vacancy rate fell around 7%.
This rush for demand has altered the Silicon Valley commercial market into one of several demonstrating suggestions of growth as the economy continues to fight to full recovery. The same as Washington and New York, developers in Silicon Valley are getting ready for new projects and the costs for office real estate is at boom-era levels.
A downtown Palo Alto office building, previously filled with engineers creating the Alta-Vista search engine and the Java-programming language, was purchased by RREEF, Deutsche Bankâ€™s property investment department, for over $60 million, or to put it more clearly, over $900 per square foot.
This particular deal is on par with a sale made in downtown Washington not too long ago as the most expensive sale of a US commercial building more than 15,000 square feet, according to one real estate analytic company.
Silicon Valley Wary of Growth
Silicon Valley is understandably wary of growth, as the recent boom has been sluggish in lifting the areaâ€™s outlying regions. Following the tech-bubble burst in 2000, the commercial vacancy scale for the top spaces leaped from around 2% up to 23% within a two-year time frame, according to one independent study.
Though the havoc caused by the bubble burst was not as grim as expected, the commercial market has not completely recovered yet, but it seems to be on its way.
The hard-hitting growth plans of Facebook, Google, and others, mostly due to the extreme interest in mobile computing and social media, have woken up the Silicon Valley commercial real estate market in the last few years.
Google is turning things around as far as growth is concerned. The company added over 1500 jobs during the first-quarter of 2011, creating a combined workforce of 26,316. In addition, the company planned to add over 6,000 staff members during that same year, a general jump of 25%.
Meanwhile Facebook has its eyes set on a one-million square foot campus originally erected for Sun Microsystems in the 1990s.
Silicon Valley vacancy rate has not completely filled up, and not as many huge deals that were closed in 2011 and 2012 have taken place. At the end of 2013, Collier International noted 16.17% availability in the commercial real estate market, up from 15.58% in 2012. In fact, the big leasing win of the year at Microsoftâ€™s Mountain-View campus was actually a renewal.
All and all, the space that was leased, in lieu of the space that was given up, was on the plus side of the initial three quarters, according to one real estate expert. The activity is partially rationalized by adding of fresh speculative commercial space coming on the market.
Moreover, availability rates in the most sought after markets, like Sunnyvale, are beneath single-digits. As expected, standard leasing prices have jumped from $2.82 per square foot from the end of 2012 to $3.18 in December 2013.
Some experts are on edge and fret that the grand building projects in progress by huge companies like Apple, Facebook, and Google, could end up turning the area into a wasteland with hundreds of thousands of square feet left to dock, transforming the commercial real estate boom into a bust.
However, though the companies are keeping mum about their intentions, commercial real estate experts believe that most of the newer projects are a representation of growth rather than relocation.
Companies Taking the Lead in Silicon Valley
- Google Expansion
Google leases made up three out of the top 10 leases in 2013. The tech giant bought property like it was going out of style. The deal that really got the commercial real estate world humming was Googleâ€™s $235.5 million attainment of over 400,000 sq ft in Mountain View from Equity office. To top it off was Google creating a sort of community in Palo Alto.
The company shelled out $66.7 million for a conglomeration of buildings off East-Meadow Circle and has been nonstop in gathering land for what may be another satellite campus. As 2013 came to a close, the word was out that Google might be in the talks about a gigantic land deal in San Franciscoâ€™s Mission Bay. Googleâ€™s largest leases in 2013 were for 168,89f sq ft in Mountain View, 232,000 sq ft in Sunnyvale, and 500,000 sq ft in Mountain View.
- A Bite of the Apple
The Apple Campus also known as the spaceship was accepted. Appleâ€™s circular-campus was approved in October 2013. At a whopping 2.8 million sq ft, itâ€™s one of the biggest single office buildings in the United States.
Apple was quick to the draw and began demolishing most of the existing structures in the area. The construction is expected to boost the economy as well. An anticipated 9,000 union construction workers are linked with the project.
Ultimately, the campus will be the home of 14,000 staff members. A financial end result study specially requested by Apple estimated the expense of the project at $3billion, though some believe the expenditures could be even more. Itâ€™s a win-win, lose-lose situation to many.
The start of construction could create expendable real estate some worry. Whether Apple will remain, or go, after all the property leased in Santa Clara and Sunnyvale in the last few years, remains to be seen.
The Campus Race
When it comes to campuses, major plans were executed. Apple, Facebook, and Samsung Semiconductor are in the lead, and all have projects under construction. Itâ€™s as if the virtual world is coming to life. LinkedIn has construction going on in Sunnyvale and more is on the way.
Nvidia Corp has campus plans in Santa Clara and the construction plans for Googleâ€™s project named â€śBay View,â€ť is put on hold while construction is being redesigned. There has been a boom of new construction companies into the area, though some are anxious about insufficient labor to complete plans.
The campus race seems to be built much on the Chinese model of huge employee groups. Itâ€™s a means of keeping the labor force together with affordable accommodation and cheaper wages. Itâ€™s a model that may very well work; however, as Silicon Valley experienced a bubble before that eventually burst, there is a possibility that once again the region could be left with a lot of something, doing plenty of nothing!
Equity Office Sales Extravaganza
One of Silicon Valleyâ€™s major and most storied property-owners, Equity Office, hocked a massive amount of property in 2013. How does several million square feet sound? The company concluded last year with success, getting rid of one of its gems, 225 West Santa-Clara St.
At the end of November 2013, the EOP, Equity Office Properties, was down roughly 6 million sq ft in Silicon Valley from 10 million sq ft during the high-times. However, EOP has pulled off a few important deals since that time. The transactions probably signify a regular exit given a five to seven year hold-strategy of EOP owners, Blackstone Group, which obtained EOP in 2007.
Exorbitant Â Prices
Investment transactions were heavy in 2013. For example, in Palo Alto, $1,000 a foot was considered the norm, as investors supported by big bucks were unperturbed shelling out top-dollar for buildings in prime locations.
Sites like 555 Hamilton Ave, 661 Bryant St, and 130 Lytton Ave, all in the Palo Alto area near Caltrain, were grabbed. Investors also had their eye on Santa Clara and Sunnyvale, and secondary-markets like Downtown San Jose with two major towers being sold in the ending weeks of last year.
Real Capital Analytics data states that $2.25billion worth of commercial space in San Jose changed ownership with 70% growth over last year. The changes in commercial property prices over time founded on various inputs, measured by RCAâ€™s Commercial-Property Price Indices, reveals pricing in the San Jose region has climbed 11% year-after-year and has currently reached 91% of their 2007 high.
Cisco Decreases its Land and Building-Holdings
At one time Cisco Systems Inc was expanding its real estate like crazy. However, those days are just about over. Cisco eliminated two key pieces of land last year. In April, it sold 57-acres in North San Jose to Trammell-Crow Co.
The following month, the company sold 150-acres in Fremont south of Pacific-Commons to Integral Communities. Moreover, in September of that same year, Cisco sold eight buildings in North San Jose to TMG-Partners, which will renovate the building and put it back on the market after Cisco leaves.
The company has laid-off thousands of employees; however, the commercial real estate deals are actually linked to a change in real estate techniques, with costing Cisco millions to modify current building for more solid floor plans.
Developing Santa Clara
Santa Clara is known as the most difficult and open Silicon Valley commercial real estate market. Yet, it has experienced major activity in 2013 as far as development is concerned, mostly due to the Leviâ€™s Stadium development.
In addition, a couple of development proposals for land north of the stadium could possibly place Santa Clara a step-up according to those involved in the project.
Arrillaga’s San Jose Mammoth Campus for Secret Tenant
It was revealed that Peery-Arrillagaâ€™s has a mammoth North San Jose office campaign, and everyone is eager to know who the tenant is. City officials have stated that there is a tenant, but no one is saying who it is.
This will be an interesting commercial real estate project to follow for 2014, as the 2 million sq ft project is due for final approval.
Google Airport-Landing in San Jose
Nearly everyone was taken by surprise when a city memorandum in early 2013 revealed that Google Incâ€™s bigwigs requested to shift their jets to a brand-new, private aircraft section at Mineta San Jose International-Airport.
The company, Signature-Flight Support, a key operator for private-plane storage and gas supplier and a fixed-base operator, will construct the $82million facility on a plot of 29 acres. The company hopes to start with construction early 2014.
The effect may not benefit area real estate; however, if Google thinks the airport can suit its needs, perhaps the cityâ€™s commercial property market will benefit in some way as well.
Major News from 2013
- Bass Pro Shops accepts a gigantic, 145K square foot San Jose lease, the first in the area. The retailer is presently into the area with permits.
- Century Theater proprietors are looking for a developer to ground-lease an 11.6 acre site. Itâ€™s not sure yet who is in on the deal, but there have been rumors circulating.
- Twitter takes up residence in Sunnyvale. The micro-blogging site has doubled in size in Sunnyvale; they will probably require more space in the near future. Itâ€™s one to watch out for.
- Chinese investors have taken over Scotts Valley previous Borland-campus. Not such a huge deal, not more than $13 million; however, symbolic of additional foreign capital ready to take its place in the Valley.
- Super Micro purchased the Mercury News Headquarters for $30.5 million. Super Micro will ultimately build new manufacturing facilities, an indication of the beginning of a renaissance in manufacturing in Silicon Valley.
- The approval for a gigantic new Sunnyvale campus by Jay Paul proved to be a winner. The renowned developer is sharpening his skills in Moffett Park, even as he leaves Palo Alto, for the moment. Perhaps Redwood City will be next?
It’s all about the Risk
Some experts feel that all the commercial real estate dealings going in Silicon Valley will leave some developers holding empty buildings. On the other hand, developers understand the possible risk, and at the moment, things are looking rather stable in Silicon Valley.