Commercial Real Estate Blog

Blue Coat Systems (NASDAQ: BCSI) has extended its lease at 420 Mary Avenue in Sunnyvale. In addition, Blue Coat signed a lease to take an additional 116,586 square feet at 410 Mary Avenue. The buildings are 3-story Class B+ Office/R&D buildings owned and developed by Jay Paul Company out of San Francisco, the same developer of the Moffett Towers Project.

The term of the new lease for both the existing and expansion space is through the end of November, 2015. The rental rate for the existing premises is $2.09 psf/NNN with annual bumps of about 3.5%. The rental rate for the expansion premises starts at $1.95 with annual bumps of 3%.

The existing space was taken as-is, and the expansion space provided that the landlord, Jay Paul Company out of San Francisco, replace the buildings HVAC system.

This deal highlights the dichotomy in the market right now. Developer Jay Paul on the one hand executes these leases at rates of $1.95-2.09, but then on the other hand has developed Moffett Towers in Sunnyvale where he is asking $2.95 NNN, down from the $3.25 he was originally asking. It highlights why leasing has been slow at that project; there is a good amount of “nice” space available in the market at rates roughly 30-40% less than what new construction is calling for. In fact, construction prices have gone up such that the disparity becomes even greater when you consider the fact that new construction needs to be taken from warm shell to finish while existing buildings might not require tenant improvement work that is as extensive.

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.

Moffett Towers, Jay Paul Company’s massive office project at the intersection of Highway 237 and Highway 101 in Sunnyvale has been on the prowl for tenants since before it broke ground two years ago. Since then, there haven’t been any reports of any tenants signing up to take the space.

Initially Jay Paul brought the project online at an asking rate of $3.25 NNN with a $25 allowance over a shell. Since then they’ve lowered their asking rate to $2.95 and kept the same allowance. We’re now hearing that a couple letters of intent are going back and forth for some space at the project, though its unclear how much space the letters of intent represent and whether they will make it to lease. It should be noted that Brocade  (NASDAQ: BRCD) did consider this project as well as Legacy’s project on North First Street before deciding to take down Hunter Storm’s @First Development.

Sunnyvale is one of the markets that has seen the most speculative construction since rents and activity have spiked in the past few years. Some of the speculative projects in Sunnyvale include:

• Moffett Towers - 1.8M Square Feet (Phase 1 complete; approx. 800K SF)
• 111 Java Drive - 3 Building, 387,196 SF Project; Building 1 under construction
• 525 Almanor Ave - 5-Story 166K SF Building; Ready for TI’s next quarter
• 2502 Town Center Lane - 315K SF Office as part of Town Center Redevelopment. Should be ready approx. Q1, 2009.

In addition to these projects which are already out of the ground, other developers in Sunnyvale have approximately another 1M square feet of Class A entitled. This excludes the 2M square feet that Juniper Networks and Menlo Equities have adjacent to Jay Paul Company’s Moffett Tower project. 

Over the past 24 months, rental rates in the Silicon Valley, the Peninsula, and San Francisco have all seen a dramatic increases. Rental rates in some buildings have jumped nearly 75% over the past 24 months thanks to aggressive new owners looking to benefit from increased demand.

During the past two quarters however, that trend has seemed to have stalled in many buildings and submarkets, and in fact we are now beginning to see some reversal. One of the more notable and bold spec projects currently under construction is the Moffett Towers project being developed by the Jay Paul Companies. The project which sits at the intersection of 237 and 101 in Sunnyvale originally was being marketed at $3.25 NNN.

The economic realities facing Silicon Valley today along with a fairly packed pipeline of office space in Sunnyvale has now caused Jay Paul to lower asking rents for the project to $2.95 NNN hoping that some leases can be signed. There were some rumors swirling around in the past that Google had signed up for some space in the project but that now seems unlikely.

The market in Sunnyvale remains to be one which developers such as Menlo Equities, Sand Hill Property, RREEF, and Jay Paul, amongst others are together delivering well in excess of a million square feet Class A office product.

This translates into an excellent opportunity for tenants seeking Class A office space to pit landlords against eachother and to strike a deal at favorable terms.

Cornish and Carey held its annual forecast in Santa Clara this week. Along the lines of what I’ve been writing about, they are predicting rental rates to be static for 2008 for office and R&D, and vacancy rates to remain in a similar state.

The fact is that there is a large amount of new space coming online in 2008. In addition, there remains a fair amount of space available outside of Palo Alto, Menlo Park, Shoreline, and Cupertino submarkets. All of these submarkets will see new buildings come online this year, though no tremendously large projects are slated to dramatically change the landscape. In Sunnyvale however, Menlo Equities, Jay Paul, Sand Hill Property/RREEF JV, and a few smaller projects are bringing online more than 1.5M square feet of space this year alone. That is enough for 7500 employees in a time when most people now see that job growth will also be static if not recessionary this year.

As a result, we believe a portion of the price increases in the past 12-30 months we’ve seen in some of the softer markets outside those indicated above have been in large part a combination of broker hype and new owners paying dear prices for commercial property and being essentially forced to raise rents to make their deals pencil.

I think that while we may not see landlords drop asking rents immediately, smart landlords see the writing on the walls and we’ll see some get more aggressive in making deals.

Shorenstein has purchased a $40M stake of the $216.8M construction financing debt package provided to Jay Paul Co. earlier this year for the construction of the Moffett Towers Project.

The Moffett Towers project includes about 900,000 square feet of Class A Office Space and will eventually include an additional 900,000 square feet as well as a 40,000 square feet fitness center for tenants.

Although no leases have been signed at the project to date, it is rumored that Google has signed up to take a piece of the project.

The developer of Moffett Towers, Jay Paul Co., was also responsible for the construction of Pacific Shores Center in Redwood City. PSC is also a 1.8M SF office project which was recently sold early this year to Starwood Capital for approximately $830M. Starwood Capital recently flipped a portion of that project to Shorenstein.