Silicon Valley Office Market Rally Continues Says Studley Report

Palo Alto, Calif. – The Silicon Valley office market sustained its dynamic performance in the fourth quarter of 2012 as steady hiring and anticipated expansion among the region’s top employers and up-and-coming start-ups fueled demand for office space. Still, the market remains bifurcated with slower leasing activity in many of the Valley’s second-tier submarkets, including Milpitas and Downtown San Jose. However, as core markets continue to tighten some tenants are exploring these areas as affordable alternatives.

According to the Silicon Valley Studley Report, Studley’s analysis of office market conditions in 12 Valley submarkets, the region’s Class A vacant available rate fell to 14.8 percent in the fourth quarter, a decrease of 3.1 percentage points. The overall rate for vacant available space decreased as well, dropping 0.8 percentage points to 12.2 percent. In sharp contrast, vacant available rates in Milpitas and Downtown San Jose are approximately 20 percent.

Companies strike preemptive deals

“As Silicon Valley companies compete for talent and space, some are striking preemptive deals with plenty of expansion opportunities in anticipation of continued revenue and payroll growth,” said George Fox, Studley senior vice president and branch manager of the firm’s Silicon Valley office.

Building purchases one option

Both tenants and investors are turning to purchasing buildings as one way to leverage the tightening marketplace. ROHM Semiconductor bought an approximately 37,000-square-foot office/R&D property at 2323 Owen Street in North San Jose for $5.9 million or $157 per square foot. The Japanese company plans to occupy approximately 18,000 square feet and lease out the balance. Another example is Oplink Communications’ acquisition of the 86,000-square-foot R&D/flex property at 1710 Fortune Drive, also in North San Jose.

Investors are capitalizing on acquisition opportunities as well, with a focus on buying properties with significant vacancy. Westport Capital Partners bought Montague @ 880 in North San Jose from EOP for $16.8 million ($83.50 per square foot). The three-building complex totals 200,000 square feet and had a vacancy of 77 percent at the time of the purchase.

Major transactions

There were five transactions in the fourth quarter of more than 100,000 square feet, including San Diego-based ServiceNow leasing 148,704 square feet in three buildings at 3250-3270 Jay Street in Santa Clara. The other four were Palo Alto Networks’ 301,163-square-foot lease at 4301-4491 Great America Parkway in Santa Clara; Apple’s 295,500-square-foot transaction at 5403 Stevens Creek Boulevard, also in Santa Clara, and its 116,586-square-foot transaction at 410 N. Mary Avenue in Sunnyvale/Cupertino; and Netflix’s 137,500-square-foot lease at Winchester Boulevard & Albright Way in Campbell/Los Gatos.

Market highlights

  • Overall asking rent stood at $2.62 per square foot, per month, up by 2.7% for the quarter. The Class A rate, $2.74, registered an increase of 0.9%.
  • Overall net absorption totaled 293,836 square feet, down by 67.4% for the quarter. On a trailing four-quarter basis, overall net absorption equaled 3.3 million square feet, an increase of 2.5 percent.
  • The trailing four-quarter leasing volume totaled 6.2 million square feet, a drop of 17% for the quarter.

Market outlook

As new construction comes to the market and supply begins to increase in late 2013 and through 2014, large tenants will be afforded more opportunities in Silicon Valley’s top-tier submarkets. “An associated benefit is that as development takes off, municipalities have been leveraging these projects to fund much-needed public infrastructure improvements,” noted Fox.

Smaller to mid-sized tenants still have an abundance of options, particularly if they are geographically flexible, but should also be prepared for tightening concessions and increased rents as the technology industry expansion continues.

About Studley
Studley is the leading commercial real estate services firm specializing in tenant representation. Founded in 1954, Studley pioneered the conflict-free business model of representing only tenants in their commercial real estate transactions. Today, with 24 offices nationwide and an international presence through its London office and AOS Studley, a partnership with Paris-based AOS, Studley provides strategic real estate solutions to top-tier corporations, not-for-profit organizations and law firms. Information about Studley is available at www.studley.com.

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