Cresa San Jose/Silicon Valley Office Market Forecast

With Office Vacancy Less than 3% in Select Submarkets, It May Be Good Time for Companies to Consider CBD

As we enter the fourth quarter, Class A office vacancy has dropped to 3% or less in select submarkets in Silicon Valley, and corresponding rental rates continue to rise.  Accordingly, now may be a good time for tenants to consider available alternatives in San Jose’s Central Business District.  So says Mike Michaels, managing partner at Cresa San Jose.

In his most recent market analysis, Michaels reports that Class A office vacancy in downtown San Jose is 19%, and asking rent for Class A space is about $34.00 per square foot—that’s $4.00 per square foot lower than in the suburbs.  He says that companies still have more negotiating clout in downtown San Jose, where it remains a tenant’s market, versus some outlying areas, where landlords have more leverage.

“Tenants need to carefully review their options in this highly unusual market characterized by extreme bifurcation,” Michaels says.

Going to Extremes
“On one hand, many companies, especially those in the technology sector, are attracted to the quality of life in areas like Mountain View and Cupertino.  These locations, along with Palo Alto and SOMA in San Francisco, are considered the hottest markets in the country.  Many companies hope to plant roots there, citing the importance of image, amenities, access to mass transportation, and improved ability to recruit and retain staff,” adds Michaels.

“On the other hand, companies are finding increasingly fewer options in these areas, with giants like Apple and Google gobbling up the choicest properties and pushing smaller companies to areas like Sunnyvale, North San Jose, and downtown San Jose.  Some companies in Sunnyvale are heading to North San Jose or downtown San Jose, with the recent relocation of Zscaler from Sunnyvale to North San Jose possibly part of a growing trend.”

According to Michaels, while we expect the numbers gap between the CBD and the suburbs will start to close, we don’t expect to see dramatic changes for some time.  In fact, we expect that rents in outlying areas will likely rise by another 5% through the end of 2012, and vacancy will probably drop another percentage point (recognizing that there’s not much margin where the vacancy is almost zero!).  Social media and gaming companies in particular are expected to keep the market sizzling in the suburbs.

At the end of the third quarter, Cresa reports vacancies at the following levels in these locations:

  • Cupertino:  2%
  • Palo Alto:  4%
  • Mountain View:  8%
  • SOMA:  8%

Michaels forecasts that demand will likely continue to be strong in the suburbs for the indefinite future, with more speculative building on the way and a steadier stream of available venture capital. Areas with easy access to Caltrain, including Redwood City, are in particularly enviable positions.

“Meanwhile, we expect that the CBD market will be relatively flat before it picks up in 2013,” says Michaels.  “Still, companies need to plan ahead.  For those with a long-term view and strong business plan, now would be a good time to weigh options in the CBD, whether for leasing or purchasing space.

“Looking further into the future and further up the Peninsula, we anticipate that the markets in Milpitas and Fremont will also increase in velocity, though those are typically the last to improve.”

Investing in Rehab
According to Michaels, another trend worth watching—and another opportunity for investment—is reconditioning buildings in the suburbs.  Here, where tech companies are typically seeking creative space, they will find many second and third-generation buildings that need significant rehab.  Most that have gone this route, partnering with a Project Manager to manage the space programming and buildout, report very good results.

“Overall, it is said that Silicon Valley is the first to be hit by a recession…and the first to recover,” says Michaels.  “So, while most of the major markets in the country are recovering at a very slow pace, we are once again bucking the trend, particularly in the suburbs.  And the dynamics are in place for downtown San Jose to become more vibrant as well.

“Do we really care if more professional sports teams come to Greater San Jose?  Whatever happens on that front, we will continue to offer a cool place in which to live and work while the forecast for the entire Bay Area appears to be hot well into the future.”

Mike Michaels is a managing principal and co-founder of Cresa San Jose.  Cresa is California’s largest corporate real estate advisory firm exclusively representing tenants. California offices include San Jose, Palo Alto, San Francisco, Emeryville, Los Angeles, Woodland Hills, Orange County, Ontario, San Diego, and Sacramento.

Cresa is an international corporate real estate advisory firm that exclusively represents tenants and specializes in the delivery of fully integrated real estate services, including: Transaction Management, Project Management, Strategic Planning, Workforce and Location Planning, Subleases and Dispositions, Portfolio / Lease Administration, Capital Markets, Sustainability, Industrial / Supply Chain, and Facilities Management. With 57 offices, Cresa is the largest tenant representation firm in North America. Through its alliance with Savills, one of the world’s largest commercial real estate services firms, Cresa covers more than 255 locations in 40 countries. For more information, visit www.cresa.com. 

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