Commercial Real Estate Blog

The Martin Group and its JV partner Principal Global Investors have plans to break ground shortly on 384 Santa Trinita Ave, a four-story Class A office project in Sunnyvale. The building will feature 25,000 square foot floor plates, and 3.35/1000 parking. This development would dump another 100,000 square feet of space on top of a market which has 3,000,000 square feet of Class A office space in various stages of construction and delivery, and an overall vacancy rate for office space north of 25%!

The development is scheduled for delivery late 2009, early 2010. This project might prove a little more flexible than some of the other projects going up in Sunnyvale as the 25,000 square foot floor plates with centralized lobby and elevator shafts provide additional flexibility in getting tenant suites down to 12,500 square feet or possibly even less.

The project sits on a 4.6 acre site which TMG and Principal acquired in the first quarter of this year around the same time they picked up the 6.9 acre parcel at 399 W. Java Drive in Sunnyvale. The plans for that site include a 7-story, 200K SF Class A office building.

It’s unclear what the final sales prices for the parcels were, but at the time of sale, the sellers were looking for about $66 psf on Java Drive. On Santa Trinita, the partnership leveraged the parcel with a $13.1M loan from Wachovia, which would imply similar pricing.

Between all the projects in Sunnyvale, there is some 3,000,000 square feet of new construction either ready to go or somewhere in the pipes. At 200-300 SF per employee, that represents some 10,000-15,000 new employees that developers are expecting to materialize in the city. When you consider that the total employment base of Sunnyvale is only 71,000, that is a staggering number. In fact, over the past 8 years, the employment numbers in Sunnyvale have generally been decreasing from the highs they reached in 2000. The historic employment numbers for the city are as follows:

2007 - 71,000
2006 - 70,000
2005 - 68,300
2004 - 67,700
2003 - 67,300
2002 - 69,900
2001 - 74,800
2000 - 80,400

Not sure what the developers of all these projects are thinking, and I would be very interested to hear a well-reasoned explanation, but for the time being, what is clear is that, a) it is a good time to be a sizeable Class A tenant in Sunnyvale, and b) i’m glad it’s not my money financing these projects.

Rumor is that there is a Big Four firm on the troll to take down 150-200K SF of Class A office space in Downtown San Jose. The likely suspects consist of Deloitte, KPMG, PWC, and Ernst and Young. “Friends” inside E&Y indicate it is not them, KPMG is not a likely candidate, and Deloitte’s lease obligations would indicate it’s not them either. That leaves PriceWaterhouseCoopers. We’ll assume it’s them until somebody emails us and says otherwise.

While the vacancy rate of Downtown San Jose is close to 20% for office space, there remain few options for a 150-200K square foot user when it comes to Class A Office Space in the CBD. The only two “real” options are Legacy Partner’s RiverPark Two Tower, a 300,000 SF Class A tower under construction, or what will likely be Legacy’s other tower, the former Oracle/BEA/Sobrato building located at 488 N. Almaden Blvd. (we’re speculating Legacy is the buyer, but I suppose we will find out shortly).

Other options that might work for PWC, but that are relatively shelved include Boston Properties project over by Highway 87, and the site at 2nd and San Fernando that was dreamed about a decade ago by Kimball/Small/Rockefeller. Given where construction prices are today and those projects are not even close to being out of the ground yet, those are likely not viable options.

Going back to the two real options, should Legacy not buy the Oracle/BEA/Sobrato building at 488 N Almaden, then they will have real competition on their hands. The buyer of that building will likely scoop it up for around $250 per SF and possibly less. That number would likely represent a lower or similar basis to Legacy’s RiverPark II Tower it is constructing.

What is interesting to note though is that Legacy Partners was the original developer of the RiverPark project. It sold the project to MetLife Insurance Co. and repurchased the project about three years ago. The parking structure was already in place (it was constructed at the same time Tower I was constructed), and Legacy had kept in storage for a long time many of the materials, windows, skin of the RiverPark II building it had planned to construct originally but never got around to. As a result, when they decided to break ground on the second tower, it made it a lot easier to proforma than had they wanted to build from the ground up.

Regardless, it’ll be intersting to see how this requirement shakes out and where PWC (assuming it is them) lands.

In a sign of where the housing crisis currently is, Michael Crews Development in Escondido has opted for a nover approach to selling homes: they’re offering a second home for free! If you buy into one of their more expensive subdivisions in Escondido, they’ll throw in a home from their less expensive Cityscape subdivision.

The offer has expired, but I suspect the developer is at least pleased with the coverage they are getting by putting out this offer. Nevertheless, the offer provides some insight into how far developers are looking to go in order to move inventory. A tough environment to be selling in for sure.