Apple Expanding, Again

By Sharon Simonson

Cupertino-based Apple Inc. is pursuing $65 million in tenant improvements at three interconnected buildings on Vallco Parkway in its home city.

The work is the latest expansion by the consumer-electronics manufacturer, which has gobbled up workplace space in the central Silicon Valley community for the last five years as its business fortunes have improved.

Apple acquired the properties in question, which measure more than 300,000 square feet, from the Hewlett-Packard Co. two years ago. They sit on more than 17 acres and are about a mile from the company’s headquarters as the crow flies. Neither HP nor Apple has disclosed the properties’ sales price in public filings with the Securities and Exchange Commission; they are carried on the Santa Clara County tax rolls at just shy of $25 million.

When occupied, the new square footage will boost Apple’s presence in Cupertino to more than 2.6 million square feet, according to business licenses pulled by Apple and on file at the city. That includes the company’s 1 Infinite Loop campus, which measures about a million square feet. It does not include the approximately one million square feet in Cupertino that the company acquired in 2006 and 2007 for development of its second corporate campus. That collection of buildings, which sits on 50 acres, will ultimately be demolished.

A city of about 50,000 people, Cupertino has 8.5 million square feet of offices and research and development buildings in total, according to brokerage NAI BT Commercial.

The Vallco Parkway construction, which is underway, contrasts with much of what is happening in the business world generally and the commercial real estate industry particularly. Commercial vacancy rates have skyrocketed over the last year, rents and values have plummeted and very little ground-up development or interior renovation has gone forward.

Apple reported its most profitable quarter ever at the end of last year. It had near-record revenue of $9.87 billion for the period that ended in September 2009, up 25 percent from the same period the year before.

A spokeswoman for Apple said the company had no comment about the construction work or whether it has any bearing on the proposed second campus.

Drew Arvay, a partner in the Silicon Valley office of NAI BT, said it is probably inaccurate to attribute the relative strength of the Cupertino office and R&D markets solely to Apple’s good fortunes, though the company’s good health does not hurt. Generally the West Valley—that portion of Santa Clara County that hugs state Highway 85—fares better than the rest of the region in terms of occupancy rates and rents because it is closest to elite housing markets such as Palo Alto, Saratoga and Atherton where the executives who run companies want to live, he said.

“I think this remodel is a band-aid while Apple continues work on its second campus,” Arvay said.

At the end of the fourth quarter, the Cupertino office vacancy rate was less than 11 percent, and the R&D vacancy rate was well below that. In comparison, the Silicon Valley office vacancy rate overall was 20 percent while the R&D rate was slightly lower, according to BT.

Apple’s real estate expansion is not limited to offices. Thanks to its Apple stores, the company is emerging as a major retail tenant as well. Apple had 273 stores open as of September’s end accounting for about two million square feet total. Most of the stores are in the United States, but it is expanding quickly internationally, including four new stores in France, one at the Louvre. Peter Oppenheimer, its chief financial officer, told analysts in October that the segment performed at its highest level ever in the third quarter, generating revenue of $1.87 billion, up from $1.72 billion in the same quarter a year before. The company also reported its most Mac sales ever.