Commercial Real Estate Blog

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 Rumor is that it was revoked because employees were taking advantage of the rent subsidy by grouping together to rent a place, and then pocketing the balance, meanwhile living elsewhere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.

Verisign, Inc. (NASDAQ:VRSN) is in contract to sell approximately half of its 290,000 SF headquarters in Mountain View, California. They are under contract to sell 675 and 685 East Middlefield Road for approximately $49M ($308 psf). The two buildings constitute about 159,000 SF, which is a bit more than half of the entire headquarters of 290,000 SF.

Verisign purchased the building in October of 2001 from Sobrato for about $120M in 2001 ($750 psf). A copy of the original PSA is available here. They purchased the building to get out of a 10-year lease agreement they signed in October of 2000. That lease agreement had a start rate of $7.50 NNN (per month). A copy of the original lease agreement is available here.

As part of the deal, the buyer which is PR III Middlefield Road, LLC, will lease back the facility to Verisign for a period of 2.5 years, with an option to extend for an additional five. The lease will start at approximately $2.50 NNN.

The project is across the street from Dostart Development’s 690 Middlefield Road project, which is a 340,000 SF Leed Silver Class A project going up on 15.6 acres it acquired from Hewlett Packard last year for about $60 psf (land cost). That project is being marketed at $3.65 NNN with a $35 allowance over a warm shell.

Both buildings benefit from a light rail station within the immediate walking area, though Verisign’s building will require fairly significant improvements to get them to Class A status.

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.

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.

Microsoft has launched a $45B unsolicited bid for Yahoo! Combined, the two would be a more formidable competitor to Google, both in terms of search market share, as well as ad inventory. What will be interesting to see is that if the acquisition is indeed successful, to what extend Microsoft will embrace open-source technologies and how it integrates the two companies.

From a real estate perspective, in Silicon Valley, Microsoft may elect to keep things seperate but also has the option of utilizing Yahoo!’s 50-acre campus site in Santa Clara it purchased two years ago to combine operations. Yahoo! is currently leasing most of its Santa Clara facilities on leases which expire roughly 2-3 years from now. Given the current job cuts and overall woes with the company however, it is unlikely that they would break ground on a new campus anytime soon. Microsoft recently renegotiated for a longer term on its 450,000 SF Mountain View campus.

Also today, Kara Swisher revealed financials from Facebook based on a company-wide conference call held by Mark Zuckerberg. Some numbers are below:

• 2007 Revenues: $150 million
• 2008 Revenues: $300 to $350 million (projected)
• 2007 Headcount: 450
• 2008 Headcount: 1,000 (projected)
• 2008 Capital Expenditures: $200 million (i.e., servers)
• 2008 EBITDA: $50 million
• 2008 Cash Flow (EBITDA - CapEx): negative 150 million.

Based on the above, it would indicate that Facebook will likely be out in the market very soon looking for at least 100,000 SF of space. They are also hiring an executive chef which implies that they are emulating Google in many regards and it will likely push their requirement north of 100,000 into the 200,000-250,000 SF territory to accomodate growth simply beyond the 2008 mark.

The French have selected Mountain View as one of the cities to inspire eco-friendly towns of the future. An article in the Mountain View Voice indicates that French official Jacques Attali has selected Mountain View as one of five cities representing the best role models in the world for this vision.

What is the vision?, eco-friendly villages of less than 50,000 people which embody social diversity, public transportation, open space, and a friendly business environment.

Interesting, but I doubt Mountain View’s business friendliness really had that much to do with Google’s ability to grow into the 500 lb. gorilla it is. They were simply growing at a time when others generally were not.

According to an article in the Los Angeles Times, Google was the third largest acquirer of land in Santa Clara County last year. The two ahead of Google in the race were real estate companies.

The article also points to plans by Google to develop a hotel and conference center on the east side of 101 in Mountain View, something that has been sorely lacking on the stretch of 101 from Sunnyvale up the Peninsula.