Q2 2012 San Jose, California Office Market Trends

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Q2 2012 San Jose, California Office Market Trends

The return of growth to high technology business has been key in initiating the strong recovery trends now seen in the local office market. While construction dramatically slowed, no new space delivered last year even as net absorption, at 407,000 square feet, returned to positive ground. Demand has increased since: including second quarter’s 264,000 square feet, net absorption for the first half of 2012 was 594,000 square feet. July followed with 71,000 square feet moreā€”and more is on the way. While vacancy remains elevated, a rapid rate of descent is apparent. Second quarter vacancy was 20.8%, down 50 basis points for the period, down 210 year-over-year. Rent growth has turned positive as well. Large losses in 2010 were followed by the return of growth in substantial proportions in 2011. At $30.07 psf and $23.62 psf, respective asking and effective averages for the second quarter of 2012 were up 0.2% each from the quarter before but were up 1.1% and 1.3% since year-end. Each rate saw a one-cent gain in July. While these growth rates are moderate by historical norms for this market, Mountain View’s high-tech sector has seen the highest year-over-year rent growth in the nation, at close to 60%, according to Jones Lang LaSalle.

The return of robust development, including some major projects recently added to the pipeline, has become a central theme for the current market. According to Reis’ late-September report on individual projects, 1.6 million square feet are under construction. The completion total currently projected for 2012 is 423,450 square feet in four projects, 120,000 of which, in two, had delivered per the date of this report. Of these the largest is the 97,000-square-foot Middlefield Station property, which completed in Mountain View in September. There are 303,450 square feet of office space expected to deliver in two phases of the Juniper Networks complex in Sunnyvale this November. Of the space underway as of late September, six buildings with a combined total of more than 1.2 million square feet have been assigned 2013 completion dates. The largest, due on line next June, is developer Sobrato’s 516,000-square-foot property at 2200 Lawson Lane in the city of Santa Clara. Also in Santa Clara, three phases with a combined total of 429,000 square feet are due on line the same month in the Santa Clara Gateway development.
Delivery next April is anticipated for the 227,000-square-foot Phase II at the Moffett Towers complex in Sunnyvale.

Tremendous confidence. In August, meanwhile, two major land sales toward the development of a total of 2.6 million square feet of office product were completed, the Silicon Valley/San Jose Business Journal reported at the time. The Irvine Company acquired a 32-acre parcel from Equity Office Properties along Highway 101 in Sunnyvale. “The land is entitled for up to 2 million square feet of office space. The parcel is currently home to nine office buildings totaling 503,820 square feet.” A 2013 development start, likely including demolition, is planned. And South Bay Development Company announced its purchase from Cisco Systems Inc. of an undeveloped 30.75-acre tract approved for 620,000 square feet of “office campus space” in San Jose. The two deals, an executive with Colliers International informed the source, are indicative of “a tremendous amount of optimism and confidence in Silicon Valley.” “Federal Realty Investment Trust believes so strongly in the demand for office space in Silicon Valley,” stated the Journal in a separate August report, “that it’s giving up prime Santana Row retail space [in San Jose] for the right to build out a new 230,000-square-foot office building on the mixed-use site.” In addition, Apple is planning a 3.1-million-square-foot complex in Cupertino, a 3.0-million-square-foot corporate campus for Yahoo is planned for Santa Clara, and a 280,000-square-foot expansion by Google has been proposed for Mountain View. The first and second phases of the North First Campus planned for San Jose would add a combined total of 1.4 million square feet.

Construction, riding on high-tech expansion, is the emerging story. “With additional new construction expected to break ground next quarter and tenant demand still not waning,” writes Jones Lang LaSalle, “market conditions are expected to favor the landlord until Silicon Valley reaches its peak.” Reis expects a strong preponderance of demand over new supply for the present year. Vacancy should close at 20.5%. Gains close to 3.0% are projected for both average rents.