JLL: Tenants Look to South San Mateo County for Space Options

BY THE NUMBERS

Demand for space continues to be focused on the 92 Corridor and South [San Mateo] County. The steady stream of leasing activity for space between 15,000 to 35,000 square feet over the past 24 months has been enough for landlords who own prime property to push asking rates higher, especially for well- located Class A product. Conditions for tenants looking to move to Menlo Park or Redwood City have become increasingly competitive over the past 12 months, especially along the 101. At the end of Q4 2012, Kilroy’s office development on Bohannon Drive was close to 23.0 percent vacant. Since then, a multitude of smaller tenants have inked deals there and the 374,000-square-foot office complex is now close to being fully leased, pushing firms who are still in the market further north.

Though there are several tenant requirements greater than 50,000 square feet, the minimal amount of larger space options is suppressing major transaction activity. For this reason, several developers have decided to test the market by breaking ground on speculative development. Kilroy / Hunter Storm is on track to deliver their 300,425-square-foot Redwood City project by Q4 2015, while Sobrato is aggressively pushing through entitlements for their Menlo Park development on Commonwealth. Neither project has yet to secure a tenant despite heavy interest. Once a tenant finally signs, it will signal to the market that there is still pent-up demand for large blocks of space. However, should both projects sit vacant, it is likely that developers will remain in their holding pattern.

Sales activity has ramped up when compared to a year ago. Investors have been targeting quality assets in prime submarkets, especially properties that are fully occupied by a long-term credit tenant. Although leasing activity has been stable, most investors are looking to hold their asset until office demand is more widespread throughout the market.

Leasing activity

  • Walmart.com leased 106,099 square feet at 950 Elm in San Bruno, expanding from their current location on Cherry Avenue. The building was formerly occupied by Cisco, who vacated last year.
  • Model N subleased 34,621 square feet from Openwave at 1600 Seaport Boulevard in Redwood City. They were already occupying space in a different building in the park and will be densifying their footprint by moving into a smaller suite.
  • Open source software firm Talend leased 25,079 square feet at 800 Bridge Parkway in Redwood City. The firm will be relocating and expanding from their existing office in Los Altos.
  • Arrows represent change from prior quarter

Tenants in the market

  • Marketing firm Turn is continues to look for 75,000 square feet along the 92 Corridor. The company is located in Downtown Redwood City, one of the tightest regions of the South County submarkets from an availability standpoint.

Sales activity

  • Goldman Sachs acquired a recently built, 59,000-square-foot, Class A building in Menlo Park for $47 million, or $797 per square foot, from Harmony Investments. A portion of the building was leased to Hogan Lovells, who relocated out of Palo Alto in 2012.
  • After successfully leasing both buildings to Softbank in 2013, the County of San Mateo sold the two-building, 208,000 square-foot, Class A Circle Star Campus to Griffin Capital for $90.1 million, or $433 per square foot.

Construction activity

  • Sobrato continues to push through entitlements for his Class A development on 151 Commonwealth Drive in Menlo Park. The 13.3 acre site was formerly occupied by Exponent and the developer is looking to demolish the existing 237,858 square feet of single-story industrial product and replace it with a 237,000-square-foot multi- story Class A office campus. The project is still under review by the city and requires the current parcel to be rezoned.
  • Construction at Kilroy / Hunter Storm’s Crossing 900 is on track to be completed by 2015. The 300,425-square-foot high-rise office development is located in Downtown Redwood City. The site was formerly a city-owned parking lot and is an example of how Redwood City officials are looking to revitalize the area through redevelopment.

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