WESTERN SNAPSHOT, JULY 2011

San Jose Market

The recovering San Jose/Silicon Valley real estate market kept its foot on the accelerator as momentum gained in the latter part of 2010 and continued into 2011. Employment gains were made in several sectors, including professional and business services, information, manufacturing and healthcare. The biggest story for the Valley in the first quarter occurred in the office sector, which generated 2.69 million square feet of gross absorption.

This figure was the highest amount recorded since the fourth quarter of 2001, nearly a decade ago. It was also the third time in the past four quarters that gross absorption surpassed 2 million square feet for office space. The Silicon Valley Class A office market remains exuberant and continues to be one of the two big stories today.

North San Jose is today’s hottest Silicon Valley market for building purchases. After several years of minimal sale activity, San Jose’s “Golden Triangle” area has become the location of choice for tenants, investors and developers seeking to purchase vacant and leased office and R&D properties for the new and revitalized economy.

After reaching its low point in 2009 with only a single R&D building sale in which Cisco purchased a building they were leasing, to date in 2011, we have seen eight sale transactions totaling in excess of 1.5 million square feet either closed or currently in escrow. During the first half of 2011, vacant one- and two-story buildings increased in sale prices to double what was achieved in 2010 ($50 per square foot in 2010 and $100 per square foot in 2011); the market looks to maintain momentum through the second half of 2011.

Since Silicon Valley’s total available space peaked at 58.4 million square feet in the third quarter of 2010, the availability rate for all product classes has improved from 18.6 percent to 16.7 percent. The Silicon Valley vacancy rate for all products is at 15 percent. Vacancy rates have remained between 14 percent to 16 percent since the peak of the recession in the second quarter of 2009. This recent increase in overall activity is chipping away at the amount of available space that has been lingering on the market. Gross absorption for the two most recent quarters now totals 14.02 million square feet, compared to the 10.33 million square feet absorbed in the two quarters prior. At the current pace, 2011 total gross absorption has an excellent head start toward surpassing 2010’s total of 21.82 million square feet.

The healthy absorption results are directly attributable to increased market activity from global and regional companies such as HP, Motorola, Dell, Google and Apple. With many of these big companies announcing record profits, employment forecasts are up and the overall economic outlook is more upbeat.

Technology-driven demand for real estate continues to increase while the quantity of viable options continues to decrease. With leased buildings selling for as high as a 50 percent premium over vacant buildings, investor demand to control more vacant assets is racing head-to-head against tenants who are making lease and purchase moves to control their growth destiny and simultaneously lock in lower prices ahead of looming demand-driven price increases.

Tenants own about 8 percent of the commercial real estate in Silicon Valley. In 2010, tenant purchases of vacant R&D facilities represented 40 percent of the gross absorption in the Golden Triangle, or five times their normal rate. Year-to-date we are seeing this preference continue with just under 20 percent tenant-purchase marketshare throughout the Valley.

Venture capital investment experienced a significant uptick in the first quarter. The PricewaterhouseCoopers/NVCA MoneyTree Report’s most recent venture capital numbers show that venture capital investment in Silicon Valley rose 15 percent from $2.18 billion in the fourth quarter of 2010 to $2.49 billion in Q1 2011, while total venture-funded deals allocated to Silicon Valley dropped slightly from 30.47 percent in Q4 2010 to 28.8 percent in the first quarter of 2011. This indicates that each deal is receiving more funding, which can result in increased employment, as we are now seeing across the Valley.

As a tenant, landlord, buyer or seller looking to strike at the start of a new cycle, 2011 is shaping up to be the right time to be in the San Jose/Silicon Valley commercial real estate market.

— Mark Kuiper and Jim Beeger are senior vice presidents, and Sean Toomey is vice president, of Colliers International, Silicon Valley Office.

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