North San Jose in Grand Funk?

By Jon Peterson

Molasses-slow leasing velocity in North San Jose in the third quarter has landlords and brokers watching the numbers, hoping the performance is a blip rather than the start of long-term trend.

Tenants signed only six new leases for research and development buildings in the traditional jobs’ center over the last three months. Aggregate square footage leased totaled 104,505 square feet.

Research and development properties are the valley’s most prolific with 157 million square feet valley wide and not quite 50 million square feet in San Jose, according to Colliers.

The level of North San Jose leasing activity is the lowest recorded since the fourth quarter of 1993 and is only slightly above that floor, according to a third-quarter report from long-time Silicon Valley research and development property expert Jim Beeger. Beeger is a senior vice president at Colliers International.

“North San Jose third-quarter results are best described as absolutely pathetic,” Beeger said in the opening sentence of his market update on North San Jose. “We are all hopeful that this will be a one-quarter trend and that the market will return to some sense of normalcy for the fourth quarter,” Beeger said in a follow-up telephone interview.

Silicon Valley tenants have shown an increasing preference for high quality office space in recent years, creating a disconnection between the local building inventory and tenant demand, according to Colliers. Silicon Valley has 62 million square feet of offices but only 30 million square feet are considered Class A.

Investors that have bought or will be buying properties soon in North San Jose are looking at the market on a long-term basis. San Francisco-based TMG Partners is close to buying a soon-to-be-empty building on Junction Avenue in the region, according to Cornish & Carey Commercial Newmark Knight Frank. TMG declined comment on the deal’s specifics.

“When looking at a market you need to consider the performance of the area over more than just one quarter,” said TMG director David Cropper. “If you look at the performance of North San Jose over the past seven quarters, the performance has been good, and we feel good about the area on a long-term basis going forward.”

San Rafael-based W3 Partners recently acquired a three-building complex in North San Jose that totals 185,000 square feet at 51 Rio Robles Drive, 77 Rio Robles Drive and 145 Rio Robles Drive. One of the buildings is vacant. “We still think that there is a good deal of demand from technology tenants in the area on a long-term basis,” said Diane Olmstead, a managing partner for W3. The company as an investor is not a market timer but is more interested in how a property performs on a long-term basis, she said.

The 57,000-square-foot building at 145 Rio Robles had been occupied by SunPower Corp., which designs, manufactures and markets high-performance solar-power technologies. The company is the only tenant in the other two buildings that W3 purchased, fully occupying both.

W3 felt that having an empty building would allow it to create value by leasing the property at a much higher rate, Olmstead said.

The seller was Menlo Park-based Lane Partners and Chicago-based Walton Street Capital, who were represented by Cornish & Carey Commercial. Among the brokers involved were Executive Managing Director Erik Doyle and Senior Associate Ben Bullock. Both work in the firm’s San Francisco office.

The purchase price on the buildings was $180 a square foot, or $34.5 million, according to Cornish & Carey. The property was purchased with a combination of cash and around 60 percent debt.

“The rent in 145 Rio was $1.12 per square foot from SunPower. The market rate for this kind of space is at $1.70 to $1.80 per square foot.  This would mean that the property was rented at 50 percent below market,” Doyle said.

According to the Lane Partners Web site, it purchased the buildings on Rio Robles in April 2008 in a joint venture. The deal was structured as a sale-leaseback with KLA-Tencor. The Milpitas-based company is a provider of process control and yield-management solutions in the technology field.

Lane and Walton Street completed a full renovation of the buildings in 2011. SunPower signed 10-year leases in November 2010 for the buildings to be the company’s global headquarters.

W3 acquired the North San Jose complex along with San Francisco-based Ridge Capital Investors. The transaction is typical of the kind of assets W3 likes to buy. It is known as a value-add player in the office and research and development sectors in the San Francisco Bay Area, Southern California and Seattle. Its activity in the Bay Area has been in San Jose, San Francisco and Palo Alto. Its capital sources include Hunt Realty Investments and Teacher Retirement System of Texas.