Silicon Valley
By Mark Ritchie
As
we enter mid year $2008 (sic), we’d like to take another stab at some
predictions on the Valley market as well as a snapshot of our Downtown
San Jose office market. In spite of the challenging market conditions
and pre-election uncertainties, we actually have quite a lot of speculative
office and condominium construction and, big surprise, some notable major
user commitments. Does someone know something that we informed readers
do not or is there something lurking beneath the surface that will support
these projects?
Here’s our prediction. Maybe the above title is a hint. When our
new President takes over in January, the bolts are going to fly off the
overheated Bush era printing press and inflation will unleash itself.
We have written about this before but the recent unprecedented spike in
gas prices is a perfect case study. What we (aka tenants and landlords
and their advocates) thought of as an unpayable rent just a year or two
ago may become, in another year or two, a relative bargain. The “$4.50
Per Square Foot” comes from a number that we have used in a $3.00 Class
A rent market — Downtown San Jose — as the number needed to achieve to
fund a new office building. Inflation can be real estate’s friend as we
all know and if this does actually happen and we get any softening in
commodity prices (less steel and concrete in China) we may well end up
in an unusually good position for new office development. And another
aspect of the rent prediction — the new transportation dynamics will,
in fact, make urban core transit accessible grid street pattern locations
more valuable and thus more expensive. Vote for BART.
In the near term, we have to get there, and it’s looking pretty painful.
Downtown San Jose’s office vacancy rate has spiked upward recently. BEA
System’s vaporization by Oracle threw 290,000 feet back in the pool at
488 Almaden and we now really should count the 300,000 square foot topped
off River Park Phase 2 in our Class A statistics. The net of this is Class
A jumped from 10.2% to 19.9% since First Quarter 2008, overall vacancy
from 15.7% to 21.1% in the same period. These are not approaching historic
highs but are obviously of concern, again reminding readers that as a
statistically small 8.5 million foot sub market in the center of the 150
million foot greater Silicon Valley market this can quickly go the other
way.
To wit, there were two massive space commitments this month affirming
the Valley’s uncanny ability to replicate and grow even in a down market.
Google’s 42 acre land lease with NASA in Mountain View allowing for a
1.2 million foot campus and Brocade’s 882,000 foot commitment (562,000
sf now with options to add 320,000 sf) on the San Jose/Milpitas border
are a testament to this. As an obvious urban core promoter, we might bet
that if gas hits $7 per gallon they might wish they had found the same
space in Downtown.
The residential condo market in Downtown is now entering its acid test.
Barry Swenson’s City Heights is now 60% sold out after one year and the
next three are just hanging their flags and banners and writing contracts.
Lots of risk and trepidation by all, but all are world class high rise
projects. The biggest news amongst the trio of towers is the nearly inked
commitment by Safeway to anchor the ground floor of the Tower 88 at 2nd
and San Fernando with a 16,000 foot urban store. That’s about the best
real city tattoo we’ve gotten lately in retail.
Politically the main event is whether or not we will see a sales tax increase
measure on the November ballot for the benefit of many transit projects,
but truly as the finishing touch on the complex BART funding. Recent study
of the voters’ mood on this shows that (no surprise) the rocketing gas
price and the voters’ willingness to tax themselves are directly related.
People are really getting it, we cannot build a future based on asphalt
alone, we need an underground connection to the rest of the Bay Area.
It’s only about 30 years overdue.
Celebrating more than 50 years in business, Ritchie Commercial
Real Estate is a second generation, San Jose-based commercial real estate
brokerage firm. With five local offices, it is the only wholly independent
regional firm in the Greater Bay Area. Through an affiliation with the
CORE Network, Ritchie Commercial also offers an additional 1,200 licensed
real estate professionals in all 50 states.
Mark Ritchie can be reached at
mritchie@ritchiecommercial.com