New Fault Line

121129_Registry_2013_Q1_975

Tech boom has yet to reach southern Silicon Valley, the birthplace of tech.

THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JANUARY 2013

By Sharon Simonson

[dropcap]F[/dropcap]or all the hoopla about the second-coming of the information technology boom and San Francisco’s steroid-level economic invigoration, there’s an uncomfortable, ironic and open secret that few are discussing: Large parts of tech-cradle Silicon Valley, including its central metropolitan city San Jose, are not participating.

Even as Palo Alto monthly office rents power through the $5 a foot barrier rivaled only by those in Mountain View, San Jose’s number is closer to $2.50 a foot, according to Colliers International. Even with a fifth of the existing Class A offices in San Jose vacant, developers like San Francisco’s Jay Paul Co., TMG Partners and Southern California’s Irvine Co. are building millions of square feet in Sunnyvale, Mountain View and Santa Clara—and filling it. Ditto in San Francisco. Rents for research and development buildings, San Jose’s most prevalent commercial property type by far with more than 47 million square feet, are half those of like properties north on the Peninsula.

The drive for vertical, a trend that the valley has resisted, has become inexorable. As 2012 ended, two-thirds of the leases being signed in the central Silicon Valley markets of Mountain View, Sunnyvale, Santa Clara and North San Jose were for three-story buildings or higher, said long-time Silicon Valley broker Jim Beeger, a senior vice president at Colliers International. That is the highest ratio he has ever seen, Beeger said, and he doubts it will ever go back.

The cascading recovery from Palo Alto south has reasserted itself this cycle but “people fought to stay in Mountain View harder than ever,” said Mike Field, The Sobrato Organization’s director of commercial real estate. Sobrato, one of the Silicon Valley’s most prominent commercial landlords, has been moving its locus up the Peninsula. The company, once the largest Silicon Valley office property owner with an excess of 10 million square feet, began to diversify into apartments a decade ago. It now has 7.5 million square feet of Bay Area commercial space and 7,500 apartments in the Bay Area and across the Western states. In the last 24 months the company has bought land for office redevelopment in Palo Alto, Menlo Park, East Palo Alto and for the first time San Francisco.

A year ago, workforce strategist Jim Kelly decided he had to find out for himself exactly what was going on. Historically, large Silicon Valley corporations such as Hewlett-Packard Co., Intel Corp., JDS Uniphase Corp. and others have hired Kelly to “predict the future” as he looked at workforce trends and scouted for prime new locations for corporate real estate. He also has had stints at CBRE Inc. and The Staubach Co. Today worried Silicon Valley landlords dominate his time. While the mantra has been that San Francisco is suited to the young, single professional but seasoned execs with families will want to move south, Kelly is not sanguine about its truthfulness.

Beeger is less worried. The current, “huge shift” in tenant demand mirrors the lurch the valley made 30 years ago when it moved from one-story manufacturing to two-story research and development buildings with more office space, he said. “We do see these transformations in Silicon Valley real estate every 20 or 25 years. We do it with technology. Why shouldn’t we do it with real estate?”

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Photo by Chad Ziemendorf