Monday, April 18, 2005

Silicon Valley RE Titans Say Sell

Although a brave face was put on, this MSNBC story reveals the big RE players are headed toward the exits in Silicon Valley. "The move in no way represents a fall off in confidence in the long-term prospects for Silicon Valley."

"What had been a strong flow of valley properties coming to market beginning late last year has morphed into a tidal wave of offerings in the last month to 60 days. 'It feels like there is so much product out there that it's a little distracting,' Eric Luhrs said. The offerings would represent nearly 10 percent of all of the Silicon Valley office and R&D stock."

The rush to market isn't because the commerial sector is doing well. "The 22 percent vacancy rate in the R&D market has not changed in more than a year. Office rents in Silicon Valley are at their lowest point since at least 1998 and R&D rents haven't been lower for more than a decade."

And then there's this, "'There is as much money to lend as the markets will allow,' Jeff Weidell says. The availability of debt is driving the equity side of the equation, he adds."


At 4:42 PM, Anonymous Anonymous said...

c'mon, as the son said - there selling to simplify their lives.

At 6:07 PM, Anonymous Anonymous said...

Lets not confuse the residential and commercial markets in Silicon Valley. Every day I drive along 101, 237, and 880 in the South Bay. Nothing but brand new vacant office space everywhere you look, no cars parked in the lots. The office building I work in has only 3 of 5 floors occupied. All of this new space sprouted up in the final years of the dot com boom, when all you could see was office construction anywhere you looked.

Now you can't see anything except residential construction anywhere you look. Right now every newly built residential unit is being snapped up at record high prices. What we have here is a lag. People too blind to see that the tendency is always to overbuild whenever a market is hot. What you are seeing here in the commercial space will happen in the residential space in a few years time.

At 6:34 PM, Blogger Ben Jones said...

(Lets not confuse the residential and commercial markets)

I'm not. The interesting thing about the story is that these big RE players are bailing, which has some relevance to the housing market.

Thanks for commenting.

At 6:46 PM, Anonymous Anonymous said...

There's a building in Silicon Valley that's right next to the building I work in. We call it "The Building of Death" because every company that moves in there goes out of business. First, Covad was there and then went into bankruptcy. Then, JDS Uniphase was in there, and they had a huge layoff. Then, some other dumb company was in there, and they went under. Now, some company called "peribit" is in there, and we'll forming a betting pool on when they die.

At 6:59 PM, Blogger Ben Jones said...

Please update us on what happens in "The Building of Death". Thanks.

At 8:51 PM, Anonymous Anonymous said...

Does anyone else find that the ole' Excite@Home building on the 101 is a bit...spooky? I just remember so clearly that going from field to building to packed-full building to less-full building to completely-empty building. It seems like the entire progression happened in about 15 minutes...

At 8:55 PM, Anonymous Anonymous said...

Also, there are definitely some comparisons to be made between commercial property and residential property, in that people were making the same claims ("they're not making any more land") in 1999 that are being made today. A friend is a commercial real estate broker, and I remember him describing when they determined the vacancy rate was two tenths of one percent (that is, Silicon Valley was 99.8% occupied!). Then a bunch of people built buildings, a bunch of companies went belly-up, etc. Supply -- which everyone assumed was inelastic -- suddenly expanded at the same time that demand -- which everyone took for granted -- fell off. The result was a 40% vacancy rate in Redwood City the last time I checked... Anyway, seems that the same is certainly possible in the residential market, especially in frothy markets like Vegas, SD, etc...

At 9:40 PM, Anonymous Anonymous said...

If it wasn't for all this excess liquidity and mania for any return above a 1% cap rate by investorswe'd already have RTC 2 in the commercial marketplace nationwide. I see more and more vacant space in Florida in what are supposed to be prime locations even with all the new residential construction and suppossed population explosion.

At 10:04 PM, Blogger John Law said...

I think commercial property is a good example of what could happen to residential property.

At 12:17 AM, Anonymous warstories said...

Amazing that big money is coming in buying half-vacant properties at all-time high prices. The article says that "maybe, just maybe" rents will rise.

Big deal. Let's say rents rise 20%. You still have 40% or more vacancies. Why would rents rise if there is tons of office/R&D space available? In my experience, rents rise when supply is tight, not the other way around.

During the dotcom daze, I leased about 5,000 sf in downtown SF. I took the lease in 1996. The building (great location nr Embarcadero Center) was in foreclosure and had been taken back by a Thai bank because the owner got caught in the unfolding Asian currency crisis of 1996-97 which tore apart the Thai economy.

I got a good deal: five years at $17-20 a foot for space with bay views. There was plenty of office space in the city with vacancies in the 15-20% range.

By 1998, the building had been sold. The new owner was trying to squeeze out the current tenants in order to jack up the rents. The dotcom stuff was beginning to explode and the vacancy rate dropped below 10%.

For months, I tried to lease add'l space in my building, but the owner wouldn't budge even though there was open space on my floor. I assume he hoped I would leave altogether. They weren't renewing anyone's lease. Comp space in the city was then going for $30-35 a foot. So I wasn't going anywhere with my $17-20 lease.

Finally, the owner relented and I got the add'l space for $36 co-terminus with my other lease---the owner realized I wasn't going to leave.

Then in 1999, the building got sold a REIT. They wanted to turn the building into a Class A. They renovated the lobby---flowers, paintings, marble, etc. The vacancy rate in the city was now under 2%. The new owner was charging $55 a foot.

By 2000, I was getting worried because my lease expired in a year and there was no way I could afford $55. I inquired about renewing my lease and they told me the new owner needed to see $75-80 to make the building "work" per their numbers. I decided to sell my business instead.

Everyone knows the rest of the story. The dotcoms imploded. And my building (which I left in 2001) dropped the rent from $75 to $55 to $45 to $35. Now it's back, so i hear, to the low $20's and is only 70% full. Pretty much where it was in 1996.

This is going on all over San Francisco. Yet the commercial RE market is booming---on the sales side. Buildings are changing hands at all-time high prices, despite the fact that rents are back where they were in 1996 and the vacancy rate is near 20%. Funny that office buildings are worth double today what they were in 2000 when we had $75 a foot rents and 99% occupancy.

At 4:47 AM, Blogger Sunny said...

Warstories, its the same situation in Florida. Anonymous above says there is a mania for anything over a 1% cap rate, how true! how true! I think com/re investors feel extremely confident their value will hold while wishfully thinking their rents will rise.

Another interesting tech boom real estate comparison: Here in Melbourne, Florida there is a fair amount of hi tech industry, much of it centered around NASA, but back in the mid nineties companies like Nokia and JDS Uniphase built these "avant garde", architecturally sophisticated commercial campuses. Today, of course, the companies' presence is shriveled up here and the buildings are for lease. But what other "Taj Mahal" commercial buildings do I see popping up? Real estate brokerages. They are building like there is no tomorrow and fancy stuff too. Will the same thing happen to them? because I really want to own one of those nice commercial buildings.


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