Applied Materials Takes Palo Alto Networks’ 122,000 SQFT Lease in Santa Clara

By Vladimir Bosanac

Santa Clara-based Applied Materials, the Silicon Valley tech stalwart and leader in materials engineering solutions used to produce virtually every new chip and advanced display in the world, is expanding its presence in the valley by taking over 122,000 square feet at 3325 Scott Blvd. in Santa Clara, or better known as the Campus at 3333, according to a report by the Silicon Valley Business Journal. Palo Alto Networks is the lessor of the space, which they have leased until 2021, according to data from CompStack.

Campus at 3333 is a three-phase, 1.2 million-square-foot development anchored by the 3333 Scott Blvd. building, home to Aruba Networks. The 3325 building, also known as phase two, next door is primarily occupied by Palo Alto Networks (three floors), now Applied Materials, and Lenovo, which occupies the first floor.

According to a filing with SEC, Palo Alto Networks entered into the 122,000-square-foot lease in Santa Clara “to serve as an extension of our previous corporate headquarters.” The lease contains scheduled rent increases, lease incentives and renewal options that allow the lease term to be extended beyond the expiration date of April 2021 through July 2046, according to the filing. Rental payments under the lease agreement are approximately $23.1 million over the lease term.

According to sources with information about the lease agreement with Palo Alto Networks, the company was paying north of $3.00 per square triple-net for the lease in at 3325 Scott. According to a third quarter of 2017 market report by Colliers International, Class A office space in Santa Clara hovered around $4.11.

There is some discussion in the SEC document about rent holidays expiring for Palo Alto Networks, which increased the lease liability for the company over the next three years. There is no indication why the company is vacating the location and subleasing it. Since a pretty steep stock price drop in March of 2017, the company has been able to steadily return to the stock levels from a year ago, although it is still about 20 percent down from a high achieved in mid 2015.

Applied Materials, in contrast, has steadily increased its stock price and more than doubled it since a peak in early 2015.

The Campus at 3333 was developed by Beacon Capital Partners and Menlo Equities. In 2015, they sold off the nearly 450,000 first phase of the development to Clarion Partners for $305 million or $677 per square foot.

California State Teachers Retirement System working with Los Angeles-based CBRE Global Investors paid $162.5 million, or $650 per square foot to buy phase two of the development in June of 2017 at 5.5 percent to 5.6 percent range, based on the property’s then-existing net operating income.

Finally, in August of 2017, CBRE Global Investors, working again in conjunction with CalSTRS and the Korean Postal Service on this transaction, paid $610 million to buy the 940,000-square-foot third phase of the development at $723 per square foot.

Eastdil Secured worked on all three of these transactions.

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