South Bay Commercial Real Estate Market Heats Up

Silicon Valley developers are racing to erect office and R&D buildings to meet a fresh surge of expansions by tech companies that's turning the region into a commercial real estate boomtown. Last year, the South Bay added about 26,000 employees, enough to reduce vacancy rates for R&D properties to 16.4 percent, the lowest level since 2007. And as hiring continues and popular Peninsula locations like Mountain View and Palo Alto fill up, real estate brokers say about 16 companies are currently scouring the South Bay for big chunks of space.

"Development. We haven't used that word in a while," said Chad Leiker, a vice president with Kidder Matthews, a commercial realty brokerage. "But we are starting to see that. The pressure is there to build more space." If all the known projects are completed, they would total 2.3 million square feet of space, which typically could accommodate 9,200 employees.. Buildings already under construction, mostly in Sunnyvale and Santa Clara, total 788,000 square feet, enough for about 3,100 workers.

"In the time I've worked in Silicon Valley, I've never seen a market this strong," said Jeff Houston, a senior vice president with commercial real estate firm CB Richard Ellis who has more than two decades of experience in the South Bay market. At the end of last year, the South Bay's vacancy rate for research and development space was 16.4 percent, compared with 18.3 percent at the end of 2010. "It's not just Google (GOOG) and Apple (AAPL)," said Phil Mahoney, an executive vice president with commercial realty firm Cornish & Carey Newmark Knight Frank. "Several big tech companies are actively looking for space."

Brokers say about 16 companies are each hunting for at least 100,000 square feet in the South Bay.
One of the first big projects to begin construction is the Sobrato development at Central and San Tomas expressways. Each of the two buildings is 153,000 square feet, and together they could accommodate about 1,200 employees.

"Demand is good," said Michael Field, director of commercial real estate with The Sobrato Organization. "We have a couple of tenants that are looking at the full campus and some tenants that have inquired about a single building."

In Sunnyvale, development firm Jay Paul landed the biggest lease of 2011 at its Technology Corners office complex when Google leased 715,500 square feet. The four buildings that Google took have room for about 2,900 employees. That success encouraged Jay Paul to construct two more Sunnyvale buildings. One is a office building totaling 357,000 square feet at the Moffett Towers complex. The other is a fifth building at Technology Corners that would be 225,000 square feet in size.

More construction is on the horizon.
Menlo Equities aims to break ground by early April on a multi-building project on 33 acres in Santa Clara that Menlo bought from Applied Materials. It will likely construct five buildings that total 760,000 square feet, said Henry Bullock, chairman and founder of Menlo Equities. The Irvine Company, the Southern California development firm, is planning a 400,000-square-feet project in Santa Clara on Great America Parkway near Highway 237. And South Bay Development is eyeing construction of 285,000 square feet in Santa Clara.

San Jose could be the next hot spot for new construction as demand pushes south and east. City officials have slashed taxes on new construction and tenant improvements to attract development.
And some big building that were empty only last summer will soon be full. In May, Polycom will move its headquarters, 375 workers and other operations to a north San Jose building that could contain 600 to 700 employees. By September, Flextronics will move 500 workers and its U.S. headquarters to a building next to Polycom's future offices.

Last year, demand was strong enough to reduce vacant commercial space in the South Bay by 4.1 million square feet -- roughly enough space to fill three malls the size of Stanford Shopping Center.
"We are running out of space," said Jim Beeger, a senior vice president with Colliers International, a commercial realty brokerage. "In six months, it will be very possible to run out of space."
Some of the hottest markets in the South Bay are essentially out of space now.

"Google is taking everything in Mountain View, Apple is leasing everything in sight in Cupertino -- and they both are moving into Sunnyvale," said Mark Schmidt, managing director of the San Jose office of CB Richard Ellis, a realty brokerage. Cupertino's office market has a 5.6 percent vacancy rate, while its research- and-development space has zero-percent vacancy, Cornish & Carey reported. Mountain View has an office vacancy of 5.1 percent and a research space vacancy of 6.4 percent. Sunnyvale's vacancy for both office and research space is slightly above 12 percent.

The current construction boom is very different from the one more than a decade ago that was driven by the dot-com craze."You had a lot of buildings for companies that wound up being vaporware," Bullock said.
This time around, it's Apple, Google, Facebook and other sturdy players that are expanding. The new tech stalwarts command mountains of cash. They seek to connect people with social networks, mobile devices and new consumer products, as well as to make corporate America more efficient.