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.

Coming on the heels of its recent $150M purchase of the San Tomas Business park, NVIDIA is working to put the pieces in place to develop approximately 2,000,000 square feet of office and R&D space on the site. The park and an adjacent 11-acre piece consists of 475,000 square feet of office and R&D space spread across 10 buildings on 25 acres. The project sits directly across the street from NVIDIA’s existing headquarters campus, which it is leasing from Sobrato until 2012.

Harvest Properties, which sold the site to NVIDIA, previously had plans itself for developing 2,000,000 square feet of Class A office space. The project entailed half a dozen buildings and parking garages, the tallest of the planned buildings being six stories. As of last month, the Business Journal reported that nobody was willing to comment on the development plans, but we’ve learned that NVIDIA is in fact pursuing development of the site.

Update: This job posting on NVIDIA’s site confirms the project is in fact moving forward:

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.

The latest “big news” is that Brocade is in negotiations to lease the Phase I buildings of Hunter/Storm’s office project located at the SEC of 237 and First Street. The project entails 4 Class A office buildings totaling 880,000 SF, approximately 250,000 SF of retail, a hotel, a 25,000 SF health club, and a 168-key hotel.

The 36.6-Acre property was purchased by Hunter/Storm from Palm in Q3 of 2006 for $70,000,000 or $43.90 per square foot. The purchase and contract for the sale can be viewed here.

The first phase of the office development will entail about 436,000 SF of retail making it an ideal fit for Brocade, who occupies about 405,000 SF across several buildings located at the San Jose Airport. It’s leases for those spaces expire around Q2-Q3 of 2010. A warm shell is expected to be ready for tenant improvements in Q3 of 2009 making the deal attractive for Brocade from a timing perspective.

Originally the retail portion of the center was anchored by a Target. Those plans seem to have fallen apart, perhaps at the request of Brocade who likely is not to keen with such an intensive retail use, and would likely prefer a more lifestyle-centric retail component to the project.

If this deal happens it will likely be one of the larger deals to be concluded this year and will bring some reassurance to valley landlords, some of which who have gotten a bit nervous given the uncertainty in both the leasing and debt markets. Still though, this deal seems to indicate that Brocade is simply substituting space and not growing, and therefore likely to result in 400,000 SF of additional vacancy in the San Jose market.

KT Properties has acquired the property locatd at 1 South Market St in Downtown San Jose from Haury Properties. Plans for the site include high-rise condominiums but could be changed to office if the demand materializes. KT and its partners are currently developing the AXIS residential condo project located at Santa Clara and N Almaden Boulevard.

Haury originally had been holding the site for office development but later changed those plans into residential as the office market cooled.

The city seems to prefer that the 1 S Market site go office but it doesn’t make any sense at current rents Downtonw. Legacy is in the process of building the second tower at RiverPark on W San Carlos, and the BEA building is up in the air now that Oracle is acquiring them. In addition, Boston Properties and Barry Swenson control land downtown at a lower cost basis which could go office.

As part of their cost cutting plan, Hewlett Packard is reducing its footprint in Cupertino and Palo Alto by approximately 25%. In addition, HP has in the recent past been divesting some assets it owned in the South Bay cities of Cupertino and Mountain View.

The plan is to more efficiently use space and is not a result of layoffs. HP has bounced back in recent years under the leadership of Mark Hurd, who made it part of his plan to reduce real estate costs.

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.