PALO ALTO, CA-Silicon Valley’s status as the "most dynamic and rapidly tightening US office market" continues as GlobeSt.com receives reports of dramatic leasing activity not seen since the 1990s dot-com era. Due to shrinking vacancies throughout the Silicon Valley, a huge increase in development activity is taking place.
“From 2008 to the middle/end of 2011, there was a complete stoppage of new-development activity for class-A office space, and that was largely a function of lack of construction debt from the lenders’ perspective,” Michael Polentz, co-chair of the real estate and land-use practice at Manatt, Phelps & Phillips here, tells GlobeSt.com. “Nobody was willing to do any spec development unless they had a tenant lined up. But by the end of 2011, leasing activity of existing product started moving at lightning speed. This was due largely to the low vacancy rate, and we had some large tech players that were presumably looking out strategically three to five years, recognizing that there was not a lot of existing product available, so they started gobbling up space.” GlobeSt.com recently reported on a similar phenomenon of space hoarding in the San Francisco office market.
In 2011, the absorption rate of existing office product in Silicon Valley was approximately 2.7 million square feet, an amount that has not been absorbed here since the dot-com era of the 1990s, Polentz continues. Silicon Valley currently has about 10 million square feet of existing office product in the pipeline, and roughly one million square feet of that will start or complete construction in 2012, “so there really is a movement to capture some of the energy and the fast-paced environment of what’s being taken down from larger tech players in the Silicon Valley,” Polentz adds.
According to Studley’s first-quarter Silicon Valley office report, the region’s vacant-available rate fell for the 10th consecutive quarter, dropping 1.6% to 13.4%. The class-A rate decreased even more markedly, falling by 2.5% to 19.9%. The region is the first among major U.S. metros to reach a new peak in office-using employment, which at the end of March was 3% above its prior peak in 2008.
Significant chunks of space in the market—above 50,000 square feet—have been leased to Apple, Google, Dell, Twitter, Facebook and other thriving tech companies in the three hottest submarkets of the Silicon Valley: Cupertino (slightly over 3% vacancy as of the end of first-quarter 2012), Palo Alto (4.5%) and Mountain View (roughly 5.7%), Polentz tells GlobeSt.com. Apple, which currently occupies 80% of the office market in Cupertino, has rolled out a new spaceship headquarters design that will complete in 2015 at the earliest, and the company has taken approximately 1.2 million square feet in Sunnyvale with an additional 600,000 square feet on the horizon there by the end of the year.
As a result of this strong absorption, there has been over the last six months a huge increase in development activity in the area, including speculative space. “You have new development projects that people are permitting, planning and beginning to lay out, and you have projects that were shelved during the 2008-2011 era,” Polentz explains. “They’re pulling entitlements off the shelf and putting them back in the marketplace as it relates to the existing pipeline. Local and national office and R&D developers are coming in heavy to try to capitalize on the environment.”
Despite the high level of leasing activity, asking rents declined in this market in the first quarter, Studley reports. Overall asking rent stood at $2.48 per square foot per month, down by 6.2% for the quarter, and the class-A rate of $2.83 registered a decrease of 9.6%.
GlobeSt.com has recently reported on a spate of activity in the Silicon Valley market. Earlier this month, SRGNC CRES LLC, a division of Sares Regis Group of Northern California, filed with the City of Mountain View to begin the process of repositioning and entitling a new one-million-square-foot office campus on 24 acres off Highway 237 at West Maude Ave. and East Middlefield Rd. here. The existing four-building campus on the site has 400,000 square feet of office space that is fully leased to Synopsys, which will be relocating when its lease terminates in 2015. Also, CBRE has restructured its Northern California institutional-investment team to strengthen its delivery of capital-markets solutions to commercial real estate investors in the San Francisco Bay area as well as across Northern California. The restructuring involves a relocation for one executive, a return engagement for another and a joining of forces with two other CBRE executives in the area. And, GlobeSt.com learned that Ellis Partners LLC submitted formal entitlements to develop the 101 Tech campus located near the San Jose Airport. Once constructed, the complex can host three six-story class-A office buildings totaling 665,000 square feet and a gathering hall that can house a private food court and fitness center.
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Carrie Rossenfeld
Carrie Rossenfeld is a reporter for the San Diego and Orange County markets on GlobeSt.com and a contributor to Real Estate Forum. She was a trade-magazine and newsletter editor in New York City before moving to Southern California to become a freelance writer and editor for magazines, books and websites. Rossenfeld has written extensively on topics including commercial real estate, running a medical practice, intellectual-property licensing and giftware. She has edited books about profiting from real estate and has ghostwritten a book about starting a home-based business.
