South San Jose Submarket Gains From Northern Demand

San Jose CA Highway 87
San Jose CA Highway 87
San Jose CA Highway 87

By Neil Gonzales

South San Jose real estate looks to be gaining some traction with big investment and lease transactions occurring within weeks of each other in the research and development sector alone.

Overall, “there has been more activity the last four to five quarters,” said Julie Leiker, Silicon Valley research director for commercial real estate services firm DTZ, and “there have been some large transactions lately, which is good news for the market.”

Among those recent key deals is San Francisco-based real estate investment and development company Drawbridge Realty’s acquisition of a 160,000-square-foot, two-building campus at 5300-5350 Hellyer Ave. for $37.5 million, or $234 per square foot, in late April. The seller was Hellyer Avenue LP.

The fully leased asset comprises a 60,000-square-foot, two-story office and 100,000-square-foot, single-story R&D/manufacturing space. The complex serves as the western U.S. headquarters of Cobham Electronic Systems, which has occupied the property since it was first constructed as a build-to-suit project in 2000 and leased it through May 2022. Cobham Electronic is owned by British defense and security manufacturer Cobham plc.

“The acquisition of Hellyer fits well within our profile of acquiring mission critical properties leased long term to large corporate users,” Bill Doyle, assistant vice president of investments at Drawbridge, said in a news release.

Doyle also pointed out that South San Jose, which has been struggling with high vacancy rates over the years following the building boom at around the turn of the century, is seeing increased leasing activity because of supply and pricing constraints in the northern Silicon Valley submarkets.

Leiker had the same assessment. “Tenants are being pushed down south because of the tight inventory and rising rents up north,” she said. Besides the large deals, South San Jose has seen a handful of smaller leases in the 20,000- to 40,000-square-foot range the past two quarters.

“We see [strong leasing activity] continuing in the second and third quarters of this year,” she added.

According to Leiker, the submarket’s R&D vacancy rate in the first quarter of 2015 was 20.7 percent—down from 24.5 percent during the same period last year. The average asking rent has also improved, going from $1.08 to $1.25 per square foot on a monthly triple net basis.

A few weeks before the Hellyer purchase, another British defense-product developer—BAE Systems—signed a lease for 161,718 square feet at 6331 and 6311 San Ignacio Ave. The South San Jose property will primarily house BAE’s combat-vehicles engineering operations, company spokeswoman Megan Mitchell said.

BAE is moving employees from a longtime Santa Clara site—where its existing lease is expiring—to South San Jose by the end of October, Mitchell said.

“BAE Systems has a long-standing history in the Santa Clara/San Jose area,” she said, “and as our current lease comes to an end, the company wanted to maintain our engineering center of excellence in the area.”

Another large transaction happened in late March when Redwood City-based data-center and storage provider Equinix Inc. closed on a 34-acre site at San Ignacio Avenue and Santa Teresa Boulevard for $38.3 million. The seller was programmable chip maker Xilinx.

Equinix has several other data centers in Silicon Valley, and the South San Jose site is expected to add to that capacity. “It’s a boon for South San Jose because it will bring future jobs when they do build,” Leiker said. “It’s a vote of confidence that they want to stay and not relocate.”

West Coast Commercial Real Estate News