WESTERN SNAPSHOT, JULY 2010

Silicon Valley Office Market

MARKET MOVES

The Silicon Valley office market has experienced tremendous movement from large technology firms recently, much like the game of musical chairs. When Hewlett Packard acquired Mercury Interactive Corp., the company vacated an approximately 500,000-square-foot campus in Mountain View, California. Symantec Corp., the producer of Norton Security Software, moved into approximately 250,000 square feet of space vacated by HP. Prior to the move, Symantec sold its 300,000-square-foot building in Cupertino, California, which after being vacant for a short time was 50 percent filled by Apple.

Although these firms saw recent market conditions as an opportunity to relocate, restructure and recapture favorable rents, the movement caused increased pressure on “zombie buildings” or properties that have significant capital constraints and are therefore unable to fund market-level tenant-improvement allowances or other commissions. Since landlords of these properties can’t compete with those that have significant tenant funding, the large technology firms that relocated had little interest in leasing space there.

New developments completed in the last 24 months are beginning to receive considerable interest. After more than 1 year of sitting vacant since its completion, Moffett Towers, a seven-building, 1.8 million-square-foot project in Sunnyvale, has started to see an increase in interest and small activity. Rambus Inc. recently leased approximately 150,000 square feet of space at the property, and NVIDIA, a computer graphics company, may be interested in leasing 1 million square feet of space.

MARKET MEASURE

As the economy begins to stabilize and companies become more confident in their financial decisions, there has been a flight to quality with tenants showing increased interest in Class A space. During the first quarter, Class A vacancy in the Silicon Valley dropped 150 basis points to 26.7 percent, as Class B vacancy rates increased 20 basis points to 13 percent. This trend is anticipated to continue throughout the next 6 to 12 months as the market and the overall economy continue to improve. 

THE MARK OF A MARKET

The Silicon Valley is one of the nation’s leading technology markets. The area’s most prestigious city, Palo Alto, has historically been a leading indicator of what is to come. Boasting an 89 percent occupancy rate at the end of first quarter, the city has bucked the trend of the economic downturn and kept high asking rents of $6.12 per square foot per month for Class A space versus the average asking rate of $2.81 per square foot or less per month for Class A space in cities like Santa Clara, San Jose, Cupertino and Fremont. As space runs out in the coastal city, the higher asking rents and occupancy rates are anticipated to move inland to the remaining cities in the valley, starting with Mountain View, which posted an average asking rate of $3.78 per square foot per month for Class A space, then Sunnyvale and inward toward San Jose.

— Douglas Sharpe is a senior vice president at Grubb & Ellis.

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