Is CBD Next As Silicon Valley Tightens?
SAN JOSE-With class-A office vacancy dropping to 3% or lower in some Silicon Valley submarkets and rental rates continuing to rise, tenants may begin to look at the CBD as a smart alternative with more available space options, says Mike Michaels of Cresa’s San Jose office. Class-A office vacancy in downtown San Jose is 19%, and asking rent for class-A space is $34.50 per square foot, $1.50 per square foot lower than in the suburbs, “but companies still have more negotiating clout in downtown San Jose, where it remains a tenant’s market,” adds Michaels.
According to Studley’s report on office-market conditions in 12 Silicon Valley submarkets, the region has sustained its dynamic performance in the second quarter as the technology sector continued to secure space at an unprecedented pace. The top three transactions in the areas all involved technology occupiers: LSI Corp.’s 220,590-square-foot purchase in North San Jose, LinkedIn’s 165,000-square-foot lease in Sunnyvale and Infoblox Inc.’s 126,594-square-foot lease in Santa Clara. Cresa’s second-quarter tenant’s guide reveals that other major lease transactions in the San Jose area involved Theranos, Synopsys, Barnes & Noble, 8x8 and Ruckus.
The market’s class-A vacancy rate dropped 4.8 percentage points over the last four quarters. While other key market indicators such as overall vacancy (which still remains relatively high at 19.2%) and four-quarter trailing leasing (which dropped 15.3% for the quarter to 7.7 million square feet) reflect a slight slowdown in activity, “technology companies continue to make pre-emptive strikes, claiming entire projects or multiple sites before developers even begin the marketing process,” said George Fox, Studley’s SVP and branch manager of the firm’s Silicon Valley office, in a prepared statement. “This seemingly unabated demand has also spurred new development in some of the Valley’s most-desirable submarkets, including Menlo Park, Palo Alto, Mountain View, Sunnyvale, Santa Clara and San Jose.”
Michaels tells GlobeSt.com that Apple, which along with Google and other tech giants has been gobbling up the choicest properties and pushing smaller companies to areas like Sunnyvale, North San Jose and downtown San Jose, has already taken space in downtown San Jose. This, plus the recent relocation of Zscaler from Sunnyvale to North San Jose, could be seen as part of a growing trend.
Michaels adds that the city is motivated to try to rejuvenate the CBD with parking incentives and Caltrain bullet trains that go into downtown. “There’s not been a big, big exodus or push on the part of tech companies to go downtown,” Michaels admits. “The professional-service guys, accounting and law firms have expanded somewhat downtown, but in terms of a lot of companies moving downtown, that has not yet happened. But more and more are looking at it as an alternative.”
Properties are available downtown to suit tech companies’ needs, including some larger blocks of space and a combination of newer and older space. “The majority is second-generation space, some brought to market ready, and one large building Legacy has that’s 300,000 square feet in a single building,” says Michaels. “For large-block users, that’s an option.”
Michaels predicts that rents in outlying areas will likely rise by another 5% through the end of 2012 and that vacancy will probably drop another percentage point with not much room to go before hitting 0%. He also anticipates that markets in Milpitas and Fremont will eventually increase in velocity, though those are typically the last to improve.
“Social media and gaming companies in particular are expected to keep the market sizzling in the suburbs,” Michaels tells GlobeSt.com. However, Cresa forecasts that the CBD market will be relatively flat before picking up in 2013.
Studley points out that Silicon Valley and New York City are the only two markets to have recovered all of the office-using jobs lost in the last recession. In fact, as of May, office-using employment in Silicon Valley was nearly 2,500 jobs above its prior peak in late 2008, and the area’s top employers continue to plan for substantial workforce expansion.
“As the market tightens, tenants are becoming more creative and proactive in their search for office space, exploring a wide range of options including build-to-suit, purchase and adaptive reuse of existing retail or residential space,” Fox said.
Michaels says that rehabbing, which Globest.com recently reported is a Bay Area and Silicon Valley trend, is another option for users. Cresa’s second-quarter tenant’s guide shows that companies are continuing to lease higher-quality projects, which has led some owners of second- or third-generation space to completely recondition older improvements. “Most tech companies seeking creative space that have gone this route, partnering with a project manager to manage the build out, report very good results.”
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