Industrial and R&D Product Scarce In Silicon Valley Since 2012

HFF, Bay Area, Exeter Property Group, Cohen Asset Management, Holliday Fenoglio Fowler, Newark

HFF, Bay Area, Exeter Property Group, Cohen Asset Management, Holliday Fenoglio Fowler, Newark

By Jacob Bourne

JLL’s Chart of the Week – Silicon Valley released on October 13 has triggered a great deal of interest in the development community, according to Christian Basconcillo, research manager at JLL. The chart clearly illustrates a transformation in Silicon Valley, from utilitarian industrial and R&D spaces to creative Class A office environments. Demolition of industrial-R&D inventory in the Valley leaped from under 200,000 square feet in 2011 to well over one million square feet in 2012. About 3.3 million square feet of space has been demolished and replaced with office, residential and mixed-use development over the last six years.

[contextly_sidebar id=”0a8GlWygX4C9iQeadDoJQCA5VJ9degnb”]“There are a few things occurring that has prompted a flight to quality,” offered Basconcillo. “The most notable has been the effect of Millennial talent and how they view their workplace. Walking distance to amenities, or amenitized space, modern architecture — exposed beams, glass, open area, shared space, standing desks, bench seating and proximity to public transit have been a major focus of young companies in the Bay Area. The office has very much become a marketing and recruitment tool. A company that has a 30 year-old space configuration — aka “your grandfather’s office,” will likely have a harder time attracting the young talent it needs to grow, especially when competing with well-known tech giants known for their “cool factor.” This is a trend that extends to not only the tech sector, but many other industries as well. Companies are looking to snag the best and brightest, and they are catering their space to do this, as well as retain their existing employees.”

With high land and building costs, as well as well-financed tech companies taking over space in the heart of the Valley, demand for industrial-R&D space has eclipsed supply in this sub-region, resulting in industrial vacancy rates at a mere 2.8 percent. JLL researchers found that half of the year-to-date net occupancy gains were in Milpitas and North San Jose. The sharp demand has spurred construction of new industrial product in Silicon Valley with 1.3 million square feet underway. About 34-percent of the space being built has already been pre-leased.

Michael Rosendin, executive vice president, San Jose-Silicon Valley at Colliers International, sees the current shift rooted in the doubling of Valley rents for new construction over the past decade. With land highly coveted, the boxy, single-story industrial and R&D buildings quickly lost appeal compared to the high-returns of newly renovated, mid-rise buildings equipped with the latest amenities. For industrial users that have a long history operating in the Valley and can afford to stay, Rosendin advises that a cost-benefit analysis should be conducted to gauge whether moving to a lower rent area is the right strategy.

“There’s obviously a shrinking of the building base for warehouse and R&D, and users have few options if they want to stay in Silicon Valley,” said Rosendin. “The further out they get pushed, the more difficult it becomes for these companies to serve the Valley. If they have to relocate, they go to places like Hayward or Morgan Hill. Tenant retention is going to remain for those that can afford it.”

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