Silicon Valley Office Space Market

Statistically 2011 ended up being a very good year if you were a Landlord in the Northern Area of Silicon Valley.  If you’re a Landlord that was not lucky enough to have your holdings in the Palo Alto, Mountain View, and Sunnyvale markets, then may I wish you the spillover from those markets allowing you the chance to lease your vacant buildings.  For those of you that are Tenants; my condolences if you wanted to be or ended up being a Tenant in the Northern part of Silicon Valley.  There are far better economic deals as you move into the San Jose, Milpitas, and Fremont markets!

Fourth Quarter 2011 Office Market Overview

• From quarter to quarter the vacancy rates continue to drop 20%, then 18%, then 16%, then 15% and now in Q4 2011 13.20%!  When comparing one year ago, the vacancy rate was 18.22%.  What a dramatic drop in just twelve months!

• Here’s a bit of a strange phenomenon….one would think with vacancy rates going down that asking rates would be increasing.  That doesn’t seem to be the case.  Some city’s lease rates have gone up in the last quarter (Los Gatos, Mountain View, Santa Clara) but overall the average asking lease rate has actually gone down $0.03/sf.  Such a decline can only be based on the fact that so much of the Class A office space has been leased and what remains is product with lower asking lease rates.

• The gross absorption went down when compared to Q3 2011 (2.9M sf versus 2.0M sf).  However, the annual gross absorption for office product was nearly 9.2M sf, the highest it has been since 2000, when it was 11.8M sf!

• Net absorption was almost equivalent from the third quarter to the fourth quarter (582K sf versus 573K sf).  However, on an annual basis net absorption was approximately 1.9M sf, which is the highest it has been since we started tracking this stat in 1992.

• During the 2011 Newsletters I had made mention of the various sizable lease transactions during the year.  Q4 2011 that was no exception with Synopsys leasing 340,913 sf in Mountain View.  Counter to what I will mention below in the R&D market, of the top ten (10) Office transactions in the Q4, only two (2) of them were sales with the remaining eight (8) reflecting six (6) direct leases and two (2) subleases.

Fourth Quarter 2011 R&D Market Overview

• Similar to the Office market, R&D vacancy rates have also been dropping but not quite as dramatically.  Comparing the third quarter to the fourth quarter, the vacancy dropped from 17.06% to 16.42%.  One year ago the vacancy rate was 18.29%.  Vacancy is certainly going in the right direction but hopefully in 2012 it can pick up some more momentum.

• The average asking lease rate for R&D did creep up a little bit from quarter to quarter ($1.05 NNN versus $1.08 NNN) with the largest jump taking place in Mountain View ($1.65 in the Q3 versus $1.85 NNN in Q4).  With the amount of activity Mountain View has seen, this jump should be seen as no surprise.

• On a quarter to quarter basis, gross absorption dropped a little bit from approximately 3.7M sf to approximately 3.0M sf.  However, the overall 2011 gross absorption was approximately 14.2M sf which is the highest it has been since 2000, when it was 28.5M sf! Now those were the good ol’ days.

• Net absorption did increase from quarter to quarter (466k sf versus 756k sf).  The annual net absorption of approximately 2.1M sf was considerably higher than in the past few years in net absorption was negative.  The 2.1M sf of positive net absorption was the most the market has seen also since 2000 when it was 4.9M sf.

• Of the top ten (10) transactions during the quarter, seven (7) of them were sales transactions, led by the Irvine Company purchasing the Central Research Park in Sunnyvale totaling 471,643 sf.  The largest lease was LinkedIn renewing and expanding in Mountain View for a total of 373,195 sf. 

2011 Summary

As 2011 is now in our rearview mirror, we always find it interesting to compare how the year felt from a business standpoint to how the numbers shook out.  We always have gut feelings when the year starts as to how the markets will perform and as it progresses we look at the real time metrics to see if reality is in line with those intuitions.  I hope that it was the same for you, but 2011 certainly seemed to be a better year than the one that preceded it.

You may recall from my newsletters throughout the year, reading about the large transactions and likely recognizing the names of the tenants that played a role in the year that 2011 became.  Notably, the size of several of the transactions, including the 750,000 sf lease of Technology Corners by Google in Sunnyvale, was what struck me.  Moffett Towers, the neighbor to Technology Corners, which is was also developed and still owned by Jay Paul saw a staggering amount of leases (over 1 million square feet) in 2011.  In general, and perhaps it was because it was the household name of media centric tech companies like Google, HP and Apple that filled our headlines, the office sector of the market seemed to steal the spot light.  However, this is a case of where the feeling of the market momentum and the absorption numbers tell a different story.

The R&D market saw a significant jump in the total square footage of deals in the larger blocks of space.  The chart below shows that from both the perspective of volume of deals and total square footage, the largest R&D spaces experienced the single largest jump from 2010 to 2011.  Within this category, nearly two thirds took place as speculative sales, not leases.  These were transactions like Ellis Partner’s purchase of the 291,000 sf ATMEL campus, Rockpoint’s purchase of the Applied Materials buildings on Scott at 295,314 sf and LBA’s acquisition of the old Rockwell Collins Building on Orchard Parkway at 208,559 sf.

The balance of the R&D market from a segmented size perspective mostly saw a decrease in both volume and total square footage of deals.  The only exception was under 10,000 square feet which did experience slight positive growth.  The office market also experienced growth under 10,000 square feet.  In the R&D market, the growth from 2010 to 2011 was substantial in this range.   If you remember the last editorial about the tide raising all boats, the proof is in the numbers at year end, at least for office landlords.

The table below provides numbers from 2009, 2010 and 2011 in each segment of space for both number of transactions (lease and sale) and total square footage.  Feel free to call me if you have any questions about specifics.

Quote of the Day:  "A fool and his money are soon invited places."  

Fourth Quarter 2011 • South Peninsula • Office and R&D