Silicon Valley Office Market Divided Says Q1 2011 Studley Report
Palo Alto, CA (April 25, 2011)  

The Silicon Valley office market, posting solid leasing volume for several consecutive quarters along with strong employment growth, is, by some measures, among the nation’s top-performing commercial real estate markets. Still, there is a definitive division within the marketplace and the two segments—high-caliber, big-block Class A space, and “other” space—reflect remarkably different conditions.

“Early last year, many of the region’s top tech firms began taking advantage of favorable lease terms to upgrade and expand their offices,” said George Fox, Studley senior vice president and branch manager of the firm’s Silicon Valley office. “That flight to quality trend has gained momentum, resulting in a tightening of the Class A market, particularly for opportunities totaling 100,000 square feet or more.”

However, small- to mid-sized companies with geographical flexibility can choose from a relatively deep pool of space, much of it still priced at pre-recovery levels. In fact, many submarkets including the East Bay, Milpitas, San Jose, Santa Clara, and Sunnyvale continue to experience distress.

Availability rates mixed

According to the Silicon Valley Studley Report, Studley’s analysis of office market conditions in 12 Valley submarkets, the region’s Class A vacancy declined for seven straight quarters, falling to 24.3 percent in the first quarter. It reached its high-water mark of 30 percent vacancy in the second quarter of 2009.

In contrast, the regional Class B and C vacancy rates have increased by 2.7 percentage points over the last two years.

Negative net absorption

Although transaction volume has exceeded its historical pace for five of the last six quarters, net absorption has slipped back into the red in the last few months. Many companies have vacated leased space or consolidated into smaller, more efficient offices, leaving behind larger blocks.

After three quarters of barely positive net absorption, the region posted four-quarter overall trailing net absorption of -510,722 square feet. Class A net absorption was still positive at +559,545 square feet, reflecting the flight to quality. However, Class B and C absorption fell further into negative territory, sliding to -1.0 million square feet, the lowest it’s been since the third quarter of 2009.

Major transactions

Over the last year there’s been a flurry of large leases signed such as those executed by Facebook, HP, Dell, Cavium Networks, and Motorola. During the first quarter, the top transaction was Motorola’s 265,000 square foot lease at Moffett Towers in Sunnyvale.  Additional top transactions closed in the first quarter include:

 

Tenant Sq Feet Address Market Area
Microchip Technology 98,423 450 Holger Way North San Jose
Intuit, Inc. 62,905 2675 Coast Ave Mountain View/Los Altos
Health Hero 36,594 2200 Geng Rd Palo Alto
Namco 33,446 1740 Technology Dr North San Jose
Intuit, Inc. 29,155 2593 Coast Ave Mountain View/Los Altos
Virtual Instruments 25,621 25 Metro Dr North San Jose
Tilera 17,173 2700 Zanker Rd North San Jose
Premier Business Centers 16,055 2570 N 1st St North San Jose
President & Board of Trustees of SCU 13,732 475 El Camino Real Santa Clara
Broadcom 12,825 100 Mathilda Pl Sunnyvale/Cupertino
Splunk 11,365 20400 Stevens Creek Blvd Sunnyvale/Cupertino
SK Telecom 11,331 150 Mathilda Pl Sunnyvale/Cupertino
BoardVantage 11,111 4300 Bohannon Dr San Mateo South County
City National Bank 10,141 1 Almaden Blvd Downtown San Jose
MBlox 8,815 430 N Mary Ave Sunnyvale/Cupertino

Market outlook

Solid hiring, a sustained flight to quality, and the resurgence in investment sales have boosted landlord confidence.  While the growth in employment is encouraging and the office market has certainly tightened, significant challenges still exist. The most recent Silicon Valley Index released by Silicon Valley Network and Silicon Valley Community Foundation spotlights the deterioration in public services as a crisis for the region.