Commercial Real Estate Blog

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Numbers today came out for the national unemployment rate, and it is no surprise that the numbers continue to rise. The national rate now stands at 6.1%, a five-year high. These numbers don’t tell us much about California and Silicon Valley, so the graph to the right and data below represent the trends for the state and Silicon Valley.

The EDD, doesn’t have a statistic for “Silicon Valley”, but the data they have available on the San Jose-Santa Clara-Sunnyvale Metropolitan Statistical Area (MSA) is sufficiently representative of Silicon Valley, particularly when you are working to contrast the numbers with commercial real estate as these three cities represent three of the larger office markets in Silicon Valley.

In Silicon Valley, the unemployment rate for July 2008 came in at 6.4%, up 30 basis points from June’s 6.1% number, and has been steadily climbing since late last year.

Some historical unemployment numbers for the month of July over the past several years are as follows.

2008 - 6.4%
2007 - 5.1%
2006 - 4.9%
2005 - 5.6%
2004 - 6.7%
2003 - 8.7%
2002 - 8.5%
2001 - 5.4%
2000 - 3.5%
1999 - 3.4%
1998 - 3.7%
1997 - 3.5%
1996 - 4.0%

The list below represents the top lease transactions which occurred in Silicon Valley during the second quarter of 2008.

RREEF is moving forward with its sale of a twenty-building portfolio it acquired as part of a larger 120 building portfolio from Peery Arrillaga two years ago. RREEF was reported to be seeking $250 psf for the portfolio, but we’ve heard the price is coming in well below that mark, somewhere around $200 per foot.

The portion of the portfolio being sold is concentrated in Sunnyvale along 237, and represent leased investments. The deal is expected to close sometime in early September.

UPDATE (07/23): Globe Street is reporting the sale at $185 psf ($74M) to DRA Advisors/Landmark Asset Management Group.

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.

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.

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. 

The Contra Costa times featured an article today highlighting the relatively inexpensive rents in Fremont as spurring demand for space. While Silicon Valley and the Peninsula have seen office rates increase over the past two years or so, Fremont has remained a fairly inexpensive market. Rents have moved up in Fremont, but compared to space just over the Dumbarton Bridge or over Highway 92, Fremont is a bargain.

Fremont is a market which doesn’t have a lot of the Class A type of office space that you can find in Foster City or Redwood Shores, but it does have a few comparable buildings in its downtown area nearby the BART Station. Space in Fremont runs about $2.50 Full-Service for Class A office, while in Foster City or Redwood Shores would run you north of $4.00 Full-Service.

Supply is much higher in Fremont with vacancy rates for CTU construction offices and R&D facilities into the teens and rents 30-50% cheaper than the alternatives on the other side of the bay. Some of the new companies to move into Fremont recently include Solyndra, Super Micro Computer, and PurFresh. Also, the stock of single-story R&D buildings in Fremont is also making it a popular place for cleantech companies looking for a cheaper alternative to space along the 237 corridor in Sunnyvale, Santa Clara, and San Jose.