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A “Bloodbath” In Silicon Valley

January 5, 2010

Bloomberg is out with a hit piece on Silicon Valley’s office space market.

More than 43 million square feet (4 million square meters) — the equivalent of 15 Empire State Buildings — stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group Inc. San Jose, Sunnyvale and Palo Alto have 11 empty office buildings with about 3 million square feet of the best quality space.

Commercial property foreclosures will at least double in 2010 and job growth won’t return for two years after that, held back by U.S. consumers who are saving more and “getting back in line with sustainable spending habits,” Haveman said.

We’ve seen a lot of recent leasing activity, but most of it (aside from Facebook) consists of deals where companies are simply moving to get a better deal and possibly improve the quality of space they are in. What we need is positive absorption, and if job growth takes two more years to surface, then owners of some buildings, particularly Class B buildings purchased during the peak of 2005-2007, will start to lose their grip.

Indeed, many of these assets are worth a fraction of what they were acquired for or what they cost to build:

“Many of these assets have lost half their value,” said Dan Fasulo, managing director of New York-based research firm Real Capital Analytics Inc. “That’s a bloodbath.”

But there is hope for some assets. Those with loans parcelized out in CMBS fashion will face the biggest challenge, while loans held on the books of one or two banks will likely fare the best in hanging on. The capitalization of banks was a big issue 6-12 months ago, but since then those worries have subsided, likely giving owners a bit more breathing room when dealing with banks. Had the capital crunch continued to be as severe of a problem for another 6-12 months, it would have likely been a very different story.

[via Bloomberg]

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Categories: Commercial Finance and Lending | Commercial Real Estate Investing | Market Data
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