Commercial Real Estate Blog

Quite a number of startups were advised to hold excess cash in instruments referred to as Auction Rate Securities. These assets, classified as AAA debt have recently been dragged into the lock-up of the credit markets.

In an effort to achieve enhanced returns on their cash, some startups are now finding themselves in a cash crunch. Some reports estimate that up to 20% of startups hold some of their funds in ARS, with some stories reporting holdings into the millions of dollars.

The lockup of the ARS market occurred in late February. In the event this evolves into as big of a problem as some are predicting it to be, we should here about more venture loans collaterized by the ARS taking place, in addition to hearing about some startups perhaps even going under.

Over the past 24 months, rental rates in the Silicon Valley, the Peninsula, and San Francisco have all seen a dramatic increases. Rental rates in some buildings have jumped nearly 75% over the past 24 months thanks to aggressive new owners looking to benefit from increased demand.

During the past two quarters however, that trend has seemed to have stalled in many buildings and submarkets, and in fact we are now beginning to see some reversal. One of the more notable and bold spec projects currently under construction is the Moffett Towers project being developed by the Jay Paul Companies. The project which sits at the intersection of 237 and 101 in Sunnyvale originally was being marketed at $3.25 NNN.

The economic realities facing Silicon Valley today along with a fairly packed pipeline of office space in Sunnyvale has now caused Jay Paul to lower asking rents for the project to $2.95 NNN hoping that some leases can be signed. There were some rumors swirling around in the past that Google had signed up for some space in the project but that now seems unlikely.

The market in Sunnyvale remains to be one which developers such as Menlo Equities, Sand Hill Property, RREEF, and Jay Paul, amongst others are together delivering well in excess of a million square feet Class A office product.

This translates into an excellent opportunity for tenants seeking Class A office space to pit landlords against eachother and to strike a deal at favorable terms.

The Fed’s recent actions to help stabilize economic conditions are not impressing foreigner’s holding US debt instruments. The inflationary actions of the Fed have resulted in foreign buyers of US debt to essentially boycott government auctions for treasuries.

Over the past eight weeks, the share of foreign buyers participating in these auctions was somewhere around 25%. In last week’s auction, they represented only 5.8%.

Additional steps the Fed has taken or will take this week include bailing out Bear Stearns by essentially financing a JPMorgan takeover of Bear Stearns. The emergency overnight rate for bank’s was cut by 25 basis points, and in the Fed’s next meeting, they might cut interest rates by as much as seventy five basis points.

Unfortunately though, the Fed can only control short term rates. What the Fed cannot do is control long term rates and that is what will affect commercial real estate going forward. The current economic conditions, compounded by inflationary pressures and increasing long term rates does not bode well for holders of such real estate. What we see is people continuing to be bullish in certain market sectors, but it is hard to see how they envision that some sectors, such as Silicon Valley, will escape unscathed.

Time will tell who is right, but with a weakening dollar and thereby increasing commodity prices (for those priced in US Dollars), the effect will be felt in Silicon Valley. We are seeing some Venture Capitalists increasingly wary of their ability to raise any more money in this market and have become increasingly conservative in placing investments.

This has already and will continue to have an impact on the Silicon Valley Market.

Fresh & Easy, the grocery store concept by british-based Tesco who has been on an aggressive expansion plan in Southern California and soon to be Northern California reported sales numbers well below the $100M estimate over six-months.

Turns out that sales only came in at $30M. The poor performance comes at a time when the retailer is continuing its expansion plans with four stores planned in the South Bay.

An SEC filing by NVIDIA has confirmed the purchase of approximately 475K SF of Office Space and land from Harvest Properties and Blackrock in Santa Clara by NVIDIA. We previously reported on the purchase back on February 15th.

The purchase of the park comes with a price tag of $150M, includes 25 acres, and 10 buildings on the property. It is being purchased by NVIDIA.