WESTERN SNAPSHOT, JUNE 2007

San Jose, California Office Market

The Silicon Valley, including the San Jose metro area that anchors it, continues to be an exceptional place for business, education and quality of life. Venture capital maintains a healthy flow of funding into startup businesses, and technology companies that survived the technology downturn are now growing rapidly.

Upwardly trending rental rates and declining vacancies support this growth, as does the high volume of investment activity. San Jose businesses now have fewer contiguous Class A office space options in which to locate their business, and new development plans are being made for the first time since 2000.

Leasing activity in San Jose’s Class A office market remains strong and companies continue to seek newer, quality space. While the majority of tenant activity is dominated by first generation smaller companies seeking space under the 10,000-square-foot threshold, several large transactions were completed recently in San Jose. Sony subleased 164,000 square feet from Infineon Technologies at 1730 North First Street. Magma Design Automation leased 106,540 square feet at 1650 Technology Drive, of which 83,307 square feet is a sublease from Siemens. Qimonda leased 24,989 square feet from LBA Partners at 2540 North First Street. NTT America Inc. subleased 21,677 square feet from Brocade at 1741 Technology Drive and One Touch leased 19,953 square feet at 42-44 Airport Parkway.

The volume of leasing activity in San Jose contributed to both lower vacancy rates and significant rental rate increases. San Jose contains 26.5 million square feet of base inventory, and the area achieved an overall vacancy rate of 11.6 percent in first quarter 2007, down from 15.1 percent in first quarter 2006. Average asking rental rates increased from $2.05 per square foot, full service, in first quarter 2006 to $2.21 in first quarter 2007.

While San Jose has emerged as one of the last areas in Silicon Valley with discounted rental rates some landlords of high-quality product increased rents significantly this year to match comparable product type in surrounding areas. For example, Harvest Properties, the new owner of Central Park Plaza, raised asking rents by 20 percent upon purchasing the property. Equity Office Properties/Blackstone has raised their price from $2.50 to $2.75 per square foot on the 30 buildings in their San Jose Airport office portfolio.

Healthy vacancy rates and increasing rental rates continue to boost investment sales activity in San Jose. The area attracts buyers on a local, regional, national and international level; quality projects often attract multiple offers. Currently, there are no available properties on the market, but several large transactions closed in San Jose in the first quarter. BEA Systems Inc. purchased the 17-story, 381,000-square-foot office tower at 488 Almaden Boulevard from the Sobrato Foundation for $135 million and plans to make the facility its headquarters in second quarter 2008. Harvest Properties purchased the 305,000-square-foot Central Park Plaza at Zanker Road and Junction Avenue, and TA Associates completed a 300,000-square-foot four-building purchase, including three properties on North First Street in San Jose and 1900 McCarthy Boulevard in Milpitas, from Equity Office Properties for approximately $60 million. In recent land acquisitions, Tishman Speyer purchased BEA Systems Inc.’s 40-acre site on North First Street for $108 million, and Hunter Properties Inc. bought Palm Inc.’s 39-acre property, also on North First Street, for approximately $70 million. These are some of the last remaining, high-profile, undeveloped infill office sites in Silicon Valley.

The new owners of the land parcels on North First Street are responding to the City of San Jose’s pro-growth initiatives that encourage high-density and mixed-use development. Tishman Speyer plans to develop 2.8 million square feet of high-rise and mid-rise Class A office as well as 100,000 square feet of supporting retail. The company will begin construction on the property as soon as possible, with the initial phase slated for completion in early 2009. Hunter Properties is slated to develop 1.2 million square feet of office product and supporting retail on its North First Street site.

While there are currently no new construction efforts underway in San Jose, several projects, including the North First Street developments, are likely to commence soon as much of the large blocks of space currently available are located in second generation, lower quality properties. And for the first time in 6 years, tenants are inquiring about new product options to accommodate future occupancy scenarios. Silicon Valley’s most image-conscious tenants are likely to pay above-market rates for modern, efficient space and San Jose developers are preparing to respond to that demand.

Future construction plans are being designed for vertical growth, and the San Jose landscape will shift from two- and three-story low-rise buildings to high-rise office product. Additional development opportunities remain in San Jose. Philips Lumileds Lighting Company owns a 16-acre site at Orchard Parkway and Atmel Way in North San Jose that is likely to sell to a developer soon. CarrAmerica owns 70 percent of the block between Trimble, Plumeria and Orchard Parkway that is ripe for development, and Lincoln Properties has two development opportunities at the intersection of Trimble and Orchard Parkway.

The San Jose office market has improved remarkably in the past several years and continued tightening is forecasted. In first quarter 2007, a 20 percent increase in square footage requirements and a 25 percent increase in the number of tenants seeking space in Silicon Valley were observed. Overall commercial real estate activity clearly reflects that San Jose remains an excellent place to do business.

John Yandle is senior vice president and manager, Phil Mahoney is executive vice president and Jim Beeger is senior vice president in Cornish & Carey Commercial/ONCOR International’s Santa Clara, California, office.


©2007 France Publications, Inc. Duplication or reproduction of this article not permitted without authorization from France Publications, Inc. For information on reprints of this article contact Barbara Sherer at (630) 554-6054.