April 2, 2010
Sobrato has managed to bag McAfee for ~240K square feet – and potentially more – at its Santa Clara campus. The Registry has some info on the deal as well. The deal is a great one for Sobrato, which has Yahoo! on lease until the end of July. The buildings are located at 2811 and 2821 Mission College Blvd. in Santa Clara. The deal is a good one for McAfee which secured a 10-year deal with a start rate in the high teens and about a years worth of free rent, and takes over Plug N’ Play space, though undoubtedly it will need to spend dollars giving the Yahoo! space a McAfee look. Newmark Knight Frank represented McAfee, Sobrato was represented in-house.
Atheros had been negotiating on a large portion of the space until McAfee came into the picture and quickly wrapped up the space. This is the second large deal signed in Santa Clara in about a week. The week before, NetLogic signed an 8-year deal for 3975 Freedom Circle (Mission Towers) with Equity Office. The terms of the NetLogic deal were:
- 105,930 SF
- 2-Years of Free Rent
- $2.40 NNN start rate with 4% bumps every 2 years
- Turnkey by EOP (est. at $45 psf)
- 2-year right to expand to 2-3 additional floors
The McAfee and NetLogic requirement were/are not the only large requirements circling, as there are at least 3-4 other requirements currently in the market for 200K+ SF.
These deals are important for a number of reasons. The first is that as we discussed briefly back in November, that companies are getting out to tie-down the quality space, in much the same way that happened during around 2004. That trend is undoubtedly going to continue, with non-shell space going first. Investors should therefore be out looking for opportunities in shell-condition space as the demand for those products will heat up as the supply of pre-existing Class A product dries up. This doesn’t necessarily mean rents will start to take off in any meaningful fashion as many of the deals represent negligible amounts of positive absorption, but the white light at the end of the tunnel is at least somewhat visible for newly constructed assets in the market, excepting another near-term economic collapse.
The second is the impact the McAfee deal will have on Shorenstein. McAfee’s existing digs are right across Great America Parkway at Shorenstein’s Santa Clara Towers project, where McAfee is on lease until 2013 (where it is paying nearly $3.00 NNN). Tishman Speyer paid about $500 psf for the tower at the peak of the market, Shorenstein purchased the Mezz debt on the deal, and just recently took back the project. It is now asking $1.50 NNN for space at that project, which probably doesn’t bode well for Shorenstein despite its reduced basis in the deal. On top of the reduced rate, they will now have to find a way to replace McAfee in a few years, which will likely come at a fairly steep cost given the age and condition of the improvements.
The third reason why these deals are important has to do with the brokerage environment. As we’ve seen lately, many of the deals being done are being handled by firms such as CBRE, JLL, and now Newmark Knight Frank. CBRE and JLL have been eating the lunches of firms such as Cornish & Carey and BT. One of the reasons BT and CPS went to the Cassidy Turley brand was to align with a more unified platform they believed would help them go after tenants. Unfortunately Cassidy Turley doesn’t have nearly enough offices to even compare with CBRE and JLL, though the platform does significantly improve BT’s ability to expand its property management business.
But the landscape is changing, and it is changing quickly. Regional firms which have traditionally been the powerhouses are now faced with an ever-increasing production environment whereby the landlord-rep business is both slow and skinny, and a tenant rep business that is evaporating into the CBRE/JLL stratosphere. The regional firms have worked hard to diversify into property management, but it won’t be enough. Even Cushman is losing fair amounts of business locally to these groups.
Don’t get me wrong, there’s still be plenty of business to transact – a lot of which Cornish & Carey and CTBT will handle – but the overarching trend is that tenants are looking beyond the regional firms at much smaller portfolio levels than before, leading to less exposure to the big fees. It might be an unpopular question to ask, but I do wonder how much longer Cornish & Carey can manage to remain independent in the face of the increased competition around them and the changing landscape.
- Shorenstein Buys Mezzanine Debt on McCandless Towers
- Mezz Debt Loses Its Luster
- London Comp Shows 46% 2-Year Decline; Santa Clara Parallel
- Yahoo! Set To Introduce 385,000 SF of Vacancy to Santa Clara
- Silicon Valley Apartment Rents Fall 11.5%