Square Feet

After spending nearly two years working to entitle 7 acres of commercial property in West San Jose for housing, Silverstone Properties came up a vote short in the city council. The council voted this past week 6-5 against the rezoning of the property from its current office/industrial use to residential.

The mayor and the city have recently taken an increasingly firm line against rezoning of commercial land to residential use. During the past several years, land all across the valley was being rezoned to residential at a fast clip as the residential market outperformed the commercial market. Land owners sought to take advantage of the hot housing market by converting lands to residential use to increase the value of their property.

Once land is converted from commercial use to housing, particularly for sale housing, it is very unlikely that it will be converted back to office or residential. For that reason, there is a need to preserve commercial lands where possible. This particular property though, located on South Monroe Street is a property which I personally believe should have gone housing. The site doesn’t have great access and visibility, and it is currently surrounded by a park and other residential housing units, making it a great residential site rather than an office or industrial site.

To balance commercial land preservation while providing adequate housing stock, the city should look instead to encourage higher density mixed-use developments (commercial+residential) nearby and along major arterials, public transportation lines, freeways, and other sites where traffic impacts are minimized. Some progress is being made in North San Jose, but there are other areas of the city which could benefit from this same approach. This is of course a simplification of a complex problem, but the point is that there is a way to balance housing requirements while preserving commercial lands, and the two uses need not always be at odds with each other.

We’re starting to see more reports of the credit crunch infecting Silicon Valley make the mainstreem press. IHT came out with an article the other day discussing how startups in Silicon Valley are beginning to feel the crunch.

For the most part, landlords and brokers have remained fairly bullish on the prospects of Silicon Valley with some landlords continuing to raise rents on some buildings despite having signed no deals in the building at the lower rental rate they were asking only a few months ago. It should also be noted that some landlords such as Jay Paul at their Moffett Towers project have been lowering rents at the same time.

But I think many people are making a mistake here. They’re looking at what’s on the ground now and assuming that because we have so many multi-national companies here, we will somehow be okay. But Silicon Valley has never been about “today”. It has been about innovation, and “tomorrow”, and that’s where I think people need to look when assessing the situation.

What is happening with the capital markets is affecting startups today, but tomorrow it will be the VC’s themselves who face a tight capital market when looking to raise capital for their next fund. VC’s with solid track records will likely be able to raise additional funds, but many others will likely not be as fortunate. As a result, we’re seeing some VC’s becoming increasingly cautious with their existing capital, and funding fewer companies and under better terms. It is that reason why that unless the capital markets are able to sort themselves out, Silicon Valley will not be immune and the downturn may be worse than many think.

NREI is reporting that in January, not a single CMBS was priced in a one-month period. This is the first time in the 20-years since CMBS product was introduced that this has happened.

Also telling is that despite this lack of activity, some $37B in securitizations remain in the pipeline. In the face of this prices have seemed to remain resilient. Longer term though, it is difficult to see how prices will be able to withstand the financing conditions if they continue. Goldman Sachs analyst James Fotheringham doesn’t see it happening and has forecasted that commercial real estate prices might be susceptible to a drop of up to 26% in value through 2009.

Faced with a possible downturn in the economy, tenants seeking space in San Francisco returned to the sidelines in the fourth quarter. 2007 saw a number of large deals take place including 200K for Google and 170K for O’Melveny & Myers. Rents also saw an uptick in 2007 overall, but that trend seemed to have stalled in the fourth quarter as tenants seemed to begin questioning whether the economy had the legs to support the demands of landlords.

As new landlords have moved into the San Francisco office market over the past few years, there has been a rapid push to raise rents and lower tenant improvements and concessions as the economy recovered and financial district vacancy dipped below 10%. Now that there is some doubt about the economy, tenants have pulled back until there is more visibility in the market while landlords are also seemingly on the sidelines about making concessions.

Uncertainty coupled with troubles facing the financial market has caused a significant slow down in demand for space in the financial district. There is approximately 1M square feet of new office development coming online in the city this year which has not been pre-leased. The additional supply, possible uptick in sublease space available could finally put the pressure on landlords in the second half of 2008.

Most of Silicon Valley has been unscathed by the sub-prime mess with bank-owned homes being a fairly uncommon site (with the exception of East San Jose). Lately however we have been finding more and more bank owned properties in more exclusive neighborhoods. For the past several years finding a bank-owned property in Los Gatos, Saratoga, Palo Alto, or San Francisco would have been very rare. While the number of properties coming on the market that are REO in these markets still remains low, we have noticed a few cracks begin to show in these high end markets.

What we have also noticed is that there is a fair number of NoD (notice of defaults) occurring in some of these higher end markets as well. The numbers are still insignificant in these particular markets to have any material impact as the market remains hot enough to allow people in trouble to get out safely, it is something to keep a close eye on as some good opportunities might be arising very soon.

Some of the sites for the lenders which they list their REO properties on include:

Bank of America REO

Countrywide REO

Wells Fargo REO

The California High Speed Rail Authority has voted to include San Jose on the San Francisco-to-Los Angeles High Speed Rail that it is planning. The 200MPH rail was voted to travel through San Jose’s Diridon station which at some point is slated to become a stop for VTA, CalTrain,AltaMont, and BART trains.

The cost of the project is $30B and will include $10B of funding coming from state issued bonds which will likely go up for vote in 2008.

In the online world, software has enabled retailers to analyze visitors shopping patterns with a click of a mouse. In the brick and mortar world of retailing, developers, architects, and retailers each spend massive amounts of time and money designing projects and stores in ways which maximize foot traffic and stickiness, which for developers means maximizing rental rates, and for retailers sales per square foot.

A U.K. based company named Path Intelligence has devised a novel system which allows both mall owners and retailers to analyze foot traffic. It uses a combination of proprietary hardware and software to detect and triangulate on shopper’s cell phone signals to an accuracy of one meter. The software then uses that date to visually display data which can help determine traffic patterns and answers questions relating to store stickiness, bottlenecks, etc.