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Google, Inc. and Cisco Systems, Inc. drove the market in 2007, leasing in excess of two million s.f. of existing Class A product. Arguably equally as important to the continuing recovery of the Silicon Valley were transactions by a number of less well known names such as Juniper Networks, Redback Networks, NetApps, Qualcomm, Inc. and VMWare. Theses technology companies, along with many others, are growing rapidly and as a result expanded their footprints in the Valley by leasing, purchasing or developing a mix of Class A and B office and R&D space.
New development is occurring or scheduled to break ground in nearly every Silicon Valley submarket from Palo Alto to Fremont in the East Bay. Developers are anticipating that the Cisco’s and Google’s of the Valley will continue to have a large appetite for Class A space, or that the likes of a Broadcom or LSI Logic will consolidate into new state-of-the-art, LEED certified developments. One of the biggest questions yet to be answered is whether or not these companies will be able to secure board approval to move into these developments - which was rumored to be the case with software developer MacAfee, Inc. There has yet to be a transaction outside of Palo Alto to support the level of pricing necessary to justify developers’ construction and carrying costs and it is still more cost-efficient to retrofit the abundant volume of obsolete, available Class B office and R&D product throughout the Valley. Additionally a number of tenants have assumed a “wait and see” approach, taking advantage of high-quality, short-term subleases at a significant discount to prevailing market rates.
Not withstanding the above; tenants are treading more cautiously in today’s market conditions. They are methodically examining their space requirements amidst 20 percent plus rental rate increases, the sub-prime mortgage crisis and the threat of a national recession. There remains a large discrepancy in rental rates by submarket and by class which is making occupancy planning for the future a more difficult task. Mid-size tenant activity is forecasted to remain healthy into the first half of 2008; however the volume of big-tenant deals seems to have thinned with a number of requirements rolling over from 2006 being satisfied in 2007.
Lease Transactions
Large transactions completed in the last 90 days:
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Cisco Systems, Inc. leased the three-building, 475,000 s.f. campus at McCarthy Ranch from Equity Office in Milpitas, bringing their 2007 leasing transaction total to more than 1.2 million s.f. The project also includes a 1 million s.f. development option.
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Google, Inc. leased the three-building 330,000 s.f. Alza Corporation campus in the Shoreline submarket of Mountain View. Google now owns or leases nearly 56 percent of all existing commercial real estate in Shoreline. The deal also gives Google control of development options on 10 acres of land owned by Peery-Arrillaga. Alza announced plans to cut 600 R&D positions in Mountain View in July.
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In addition to taking occupancy of their new 460,000 s.f. campus, VMware subleased 115,000 s.f. from Xerox at their Stanford Research Park R&D campus in Palo Alto. VMware is the biggest technology success story of the year, seeing its stock price peak at a gain of more than 260 percent over its IPO offering price in August.
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The Moore Foundation leased 62,155 s.f. from iStar Financial at 1661 Page Mill Road in the Stanford Research Park in Palo Alto. The Intel Corporation founders’ not-for-profit foundation will expand into the space from their current location in downtown San Francisco.
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Aruba Networks leased 50,000 s.f. from Four Corners Properties at 1344 Crossman Avenue in the Moffett Park submarket of Sunnyvale. Aruba expanded into the second story of the building and subleased an additional 50,000 s.f. in the neighboring property at 1322 Crossman Avenue.
Building Sales
Building sales of note:
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JP Morgan purchased the three-building, 473,000 s.f. Sunnyvale Town Center from local developer The Mozart Development Company for $272 million ($575/s.f.). It had been rumored that Mozart turned down several unsolicited offers for the complex earlier in 2007 believing that rising market conditions in the Valley would see the property fetch offers in the $700/s.f. range.
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The Lionstone Group purchased the five-building, 223,000 s.f. Page Mill Hill office complex in Palo Alto’s Stanford Research Park from Vulcan Real Estate Group. The sale price was $95million ($425/s.f.) and the complex was 85 percent leased at the time of sale.
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BPG Properties, Ltd. made their first Silicon Valley investment purchasing the nine-building, 619,000 s.f. Park Center Plaza in Downtown San Jose from Divco West and RREEF. The total purchase price was $169.5 million ($282/s.f.) and the portfolio was roughly 75 percent occupied at the time of sale.
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Legacy Partners purchased a 19-acre development site on Orchard Parkway in North San Jose from Phillips-Lumileds for an estimated $36.3 million. The site is entitled for 70 percent FAR, however, the City of San Jose would permit up to 120 percent FAR as a part of their Vision 2030 high-density corridor plan. Legacy plans on developing two, six-story buildings in the first phase of development.
Construction Activity
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Tishman Speyer announced plans to break ground on Phase I of their 2.8 million s.f., eight-building campus @ First project in North San Jose in May, 2008. Phase I consists of two 11 and 12-story buildings totaling 640,000 s.f. The site is also entitled for up to 200,000 s.f. of retail.
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Jay Paul Company now has two eight-story buildings shell-complete at their 1.8 million s.f. Moffett Towers development in Sunnyvale. Two additional eight-story buildings are scheduled for delivery in 2008. Shorenstein Company took a $40 million stake in Jay Paul’s $216.8 million construction financing debt, pushing Jay Paul to continue moving forward on Phase II of the project in light of not having signed a lease since construction on the project began in 2006.
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Hunter-Storm Properties announced plans to break ground on Phase I of their 880,000 s.f. @ First development in North San Jose in May, 2008. Phase I is comprised of two, seven-story, 220,000 s.f. towers and 250,000 s.f. of retail to be anchored by Target.
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Legacy Partners have broken ground on Phase I of their 870,000 s.f. America Center development in Santa Clara. Phase I is comprised of two, six-story buildings totaling 210,000 s.f. each. Phase II includes an additional two six-story towers and an 88,000 s.f. full service hotel. Steel is scheduled for delivery in March, 2008 with a shell completion date estimated at April, 2009. The project is LEED Gold pre-certified.
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Legacy Partners announced their plans to begin construction on Phase I of their Legacy on 101 development in June, 2008 with shell target completion date of April, 2009. Phase I consists of two, six-story office buildings totaling 180,000 s.f. Phase II will include one additional, 180,000 s.f. tower. The project is LEED Silver pre-certified.
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Legacy Partners have begun to drive piles into the ground on Phase II of Riverpark Towers in Downtown San Jose. The tower will be 16-stories totaling 318,609 s.f., utilizing efficient 19,500 s.f. floorplates. Steel is scheduled for delivery in March, 2008 with a shell completion target date of April, 2009. The project is LEED Gold pre-certified.
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