Divco, TPG See South Silicon Valley Rising

SiliconSage, San Jose, Willow Glen, Santa Clara, Sunnyvale, Fremont, 1821 Almaden Road, Silicon Valley housing

| By Sharon Simonson |

With their nearly $800 million purchase of the Mission West Properties portfolio, San Francisco-based Divco West and global investment firm TPG are banking on the turnaround of traditional Silicon Valley—especially its southern crescent and weakest submarkets to date.

San Jose commercial real estate The RegistryOf the 6.4 million square feet of research and development space the partnership has acquired, approximately half, or more than three million square feet, is in South San Jose. The building cluster on either side of U.S. 101 at the southern terminus of California Highway 85 has just begun to feel the technology recovery—three years since tech exploded in Palo Alto and South of Market Street in San Francisco.

The duo is acquiring millions more square feet in North San Jose and Santa Clara in the traditional tech-company stronghold known as the Golden Triangle, as well as Fremont and Milpitas—all submarkets that have made a slow recovery. Availability rates heading into the final quarter of the year remained above 18 percent in all of them, according to research data from CBRE Inc. In Fremont, the availability rate topped 24 percent as the fourth quarter began.

In comparison, less than 2 percent of the R&D square footage in Palo Alto was available for lease while 5.6 percent was in Mountain View and Los Altos.

Only 11 of the Mission West properties selling to Divco and TPG Real Estate are located in the currently “hot” Silicon Valley submarkets of Sunnyvale, Cupertino and Mountain View.

But CBRE Senior Vice President Joe Moriarty, a long-time real estate advisor to Mission West, says despite South San Jose’s history as a late bloomer in market recoveries, it competes based on its large population base, environmental aesthetics and strong company retention.

Moreover, with the redevelopment of the 332-acre former IBM corporate campus nearby at Highway 85 and Cottle Road into nearly 3,000 homes and a Target-anchored shopping center, the Mission West properties should be better positioned with time.

“It’s a nice atmosphere,” Moriarty said of South San Jose’s ethos of suburban-intensity housing and commercial development surrounded by large public spaces.

The location creates a reverse commute for residents living to the north and is a short commute from Morgan Hill and Gilroy to the south. “It has been an education process, but the one thing about South San Jose is that when companies go there, they love it and rarely leave,” Moriarty said.

The Divco-TPG partnership, M West Holdings LP, is expected to finance more than $400 million of the $797.4 million purchase price with equity, according to proxy materials filed by Mission West with the U.S. Securities and Exchange Commission.

Another $138 million is to come from new debt sponsored by Bank of America. The buyers also will assume existing debt of $112 million payable to Allianz Life Insurance Co. of North America and $139 million to Hartford Life Insurance Co., Hartford Life and Annuity Insurance Co. and Hartford Life and Accident Insurance Co.

Entities controlled by Carl Berg, founder and chairman of the dissolving Mission West, will continue to own two large Silicon Valley building concentrations. A seven-building Mountain View campus that houses Microsoft Corp. has more than 500,000 square feet. It fronts U.S. 101 at the northern terminus of state Highway 85. Apple Inc. occupies five buildings in Cupertino with nearly 460,000 square feet.

Berg fought to lower the value of the buildings he retained. Neither Apple nor Microsoft sought to acquire their buildings when offered, according to the proxy. Berg argued in part that he faced uncompensated risk because Microsoft had refused to engage in lease renewal discussions for its lease, which expires in August 2014.

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