Commercial Real Estate Blog

Landlords across Silicon Valley are working hard to get space leased, and in the process are offering everything from teaser start rates to bonuses to the brokers. In fact, in the past two months we have seen a dramatic increase in the number of landlords who are looking to entice brokers by providing them with bonus payments for bringing them deals.

My feeling is that unless we see some positive absorption, these types of bonus commission payments are not only likely to increase, but more and more landlords will move beyond them and lower their asking rents as well. Some projects have dramatically reduced their rental rates from the highs that were reached last year and earlier this year. For instance, Equity Office/Blackstone’s San Jose Airport portfolio has seen rents come down as much as 35-40% in some cases from the highs that were reached after Blackstone acquired the portfolio of buildings along Technology and Gateway Drives in San Jose and began to increase rents.

In fact, we have been advising clients for some time to effectuate shorter term deals if possible and not sign up for long term leases at above-market rates. The run up in rents in many submarkets was driven largely in part due to hype in the marketplace and people assuming that positive absorption would continue at the same pace. The reality was and continues to be that fundamentally, unemployment numbers in Silicon Valley are weakening, capital markets and the ability for companies to raise money remains difficult, absorption has turned down, and in the case of new buildings, the disparity in rents on new versus existing buildings remains large.

Interestingly enough, David Radcliffe, Google’s Vice President of Real Estate and a panelist at the CoreNet/ULI meeting on Corporate Campuses this past friday commented that their strategy right now is to sit tight in many instances as they see the risk of waiting to be minimal and really have no anticipation of any dramatic increases in rents happening.

Tesla has signed a lease for 89 acres of land in North San Jose off Zanker Road north of highway 237. Tesla is proposing to build a 600,000 square foot headquarters and factory facility. From what is being reported, it seems Tesla got a great deal.

Tesla signed a 40-year lease, of which the first ten years rent will be abated. The next 10 years has Tesla paying $1.5 Million per year ($.03 per square foot, per month), and the next 10 will continue the same schedule except that rent will increase annually at a rate of 2%.

In contrast, the Google ground lease at NASA was at a much higher rate of $.16 per square foot per month, and other ground leases in Santa Clara/San Jose for office development have historically been done at the $.14-.15 per square foot per month rate. In fact, Great America is even paying more for its 181-acre ground lease which was signed in 1989 - nearly $.06 per square foot, per month. On top of that, Great America thinks it’s such a great deal that in their negotiations with the 49ers, they are asking $110M for the park, with much of the value likely being attributable to the leasehold interest they have.

Granted the land is a “bit out there”, but if the city was looking to lure jobs, it could essentially do the same thing by ground leasing the land away to developers at these same give away rents and allow them to build Office, R&D, or BioTech buildings on them with the condition that any company leasing space at the project has to be a transplant from another city. In addition, those companies could be required to be “green” companies - making the whole site as “green”, if not more “green” than the Tesla Motors project. With the developer’s land costs being essentially zero, they would be able to deliver new Class A product at rates far below competitors anywhere up and down the Peninsula and South Bay. It would likely piss off other developers for sure, but it would accomplish the goal of luring companies from other areas. In fact, if you figure that on the 89 acres you could very easily accomodate 1,000,000 square feet of office development, then that would translate to roughly about 4,000-5,000 jobs, compared to the 1,000 that the city is celebrating this deal for.

On top of that, you have to remember that of the 1,000 jobs that are expected, many will be manufacturing jobs with average incomes nearly a third of what the jobs in the nicer office building will likely be paying and jobs which Tesla has said would stay on the Peninsula or South Bay even if they planted the factory elsewhere.

In addition, Tesla was able to arrange so that the state buys $100M worth of equipment and leases it back to Tesla so as to avoid sales tax, but it is unclear what will happen if Tesla goes under and the taxpayers are stuck with $100M of what will likely be worthless equipment.

The best part of the deal is Mayor Chuck Reed’s quote about what happens if Tesla doesn’t make it:

“If they don’t make it, we’ll have our land back and probably a pretty nice building on it”.

By building, he means the special purpose electric car factory that probably will be functionally obsolete the second Tesla leaves. And don’t forget the city wouldn’t have collected any rent for the first ten years anyways to help it recover any of its costs.

Faced with low single digit vacancy rates, sky-high rental rates, and rapid growth, Facebook is looking to leave downtown Palo Alto. Kara Swisher, who also revealed Facebook’s revenue numbers, is reporting that Facebook’s migration will begin as soon as the first quarter of 2009.

This isn’t new news at all since Facebook had been in the market looking at sites outside of downtown months ago, but it does signify the commitment of Facebook to move. The director of facilities for Facebook, Jim Merryman, has likely brought the decision-making powers at Facebook in touch with reality, which is staying in downtown simply is not realistic for a company such as Facebook. Operationally, it doesn’t make a lot of sense either to have a company sprawled out in so many little chunks of space.

Facebook is spread out in about a dozen locations downtown, with one of its most recent being the upstairs of the Magnolia Hi-Fi building and a small office at 101 University.

Facebook is rumored to be considering sites in Mountain View, Sunnyvale, the old HP buildings on Page Mill, as well as taking down space for a site in San Francisco. Facebook was previously represented by Staubach, but is now using Cornish & Carey. It’s likely they will stay as close as possible to Downtown Palo Alto, where until recently Facebook was subsidizing workers who lived in Palo Alto to the tune of $600/month. Rumor is that it was revoked because employees were taking advantage of the rent subsidy by grouping together to rent a place, and then pocketing the balance, meanwhile living elsewhere defeating the purpose of Facebook’s rent subsidy to keep employees close.

The San Francisco Business Times is reporting that Sequoia Capital has signed up for the top floor of Tishman Speyer’s new tower at 555 Mission Street in San Francisco. The 33-Story, 550,000 SF tower is being built by Turner Construction and is currently seeking LEED certification. It was designed by architecture firms Kohn Pederson Fox and Heller Manus.

Sequoia Capital’s deal for the top floor is reported to be coming in around $80 psf. The firm is a renowned VC with a stellar track record, including investments in YouTube, Google, 3Com, Cisco, and a long list of other successes.

Sequoia is currently headquartered at 3000 Sand Hill Road in Menlo Park and occupies building 4 along with other VC’s Menlo Ventures, Trinity Ventures, and 5AM Ventures. It’s unclear whether it is ditching Sand Hill, where rents have shot up to north of $120 psf range (and in one case to $180 psf) , or is setting up a San Francisco office in the face of the resurging internet/web 2.0 scene in San Francisco. The top floor is 15,000 SF, which generally is a big chunk for an expansion/satellite office, let alone most venture capital firms altogether. Another possiblity is that to get the top floor they needed to take down the entire floor, and will elect to sublease a portion of it.

At the end of the day, chances are pretty skinny that they’re ditching Sand Hill Road.

Yahoo has entered into a non-exclusive agreement with Google (NASDAQ:GOOG) to allow Google to run ads on Yahoo’s web properties. The deal is estimated to ad approximately $800M a year in cash flow to Yahoo. As of June 8th, Microsoft and Yahoo have concluded their negotiations as well.

Microsoft (NASDAQ:MSFT) has expressed interest in continuing negotiations for a portion of Yahoo, but supposedly is no longer interested in an outright takeover of all of Yahoo. Yahoo still is not out of the woods though, their will undoubtedly be some anti-trust scrutiny of the deal, as well as continued pressure from Carl Icahn, Boone Pickens, and other large shareholders as they likely still seek to oust Jerry Yang and supplant the board with their own, presumabely so they can push through a deal with Microsoft.

Yahoo’s shares (NASDAQ:YHOO) ended down the day 10% to $23.63, roughly 30-40% less than where a deal with Microsoft could have been struck a few months ago.

As for the real estate plans of both companies, Google recently signed a deal with NASA for a ground lease to build a campus, and Yahoo owns some 50 acres in Santa Clara that is available to it to construct a campus if need be. As of now, Yahoo is mainly spread out between its Sunnyvale and Santa Clara campuses, with much of the Santa Clara campuses and buildings owned by Sobrato.

It’s been rumoured in the past that Google was nibbling at taking down space at Jay Paul’s Moffet Towers Project. In what could be construed as less than favorable news for Moffett Towers, insofar as Google is concerned, NASA announced today that it has inked a deal with Google for 42 acres of land at the NASA Ames Research Center in Mountain View for the purpose of developing a high-tech campus for Google. Under the terms of the 40-year lease, Google will lease 42 acres to construct up to 1.2 Million square feet of an office and R&D campus. Google will pay NASA an initial base rent of $3.66 million per year. NASA will use the proceeds to cover the full cost of the lease and the balance may be used for capital revitalization and improvements of the real property assets at Ames.

Construction of the project will be in three phases, with the first planned to begin by the end of September 2013, the second phase by 2018, and the third by 2022. Google also intends on constructing company housing and dining, sports, fitness, child care, conference amenities.

In the late nineties, Sobrato signed a ground lease for the construction of its Mission Valley College office campus in Santa Clara. That was a 26-acre piece that they used to develop 685,000 SF of office on. That lease represented about $.147 per SF, per month on the dirt, and $.243 per buildable SF. In contrast, the Google/NASA deal has Google paying about $.164 per SF, per month on the dirt, and ultimately when the 1.2M SF is built out, $.254 per buildable SF.

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.