OFFICESILICON VALLEY RESEARCH & FORECAST REPORT/media/files/marketresearch/unitedstates... ·...

RESEARCH & FORECAST REPORTSILICON VALLEY

www.colliers.com/sanjose

Defying The Odds SILICON VALLEY SOARS BUT IS IT RUNNING OUT OF RUNWAY? Economists agree and the data confirms that the country is in a very slow economic recovery cycle. While it is welcome news that the recovery continues, the pace leaves something to be desired. The Silicon Valley is certainly faring better than most of the country and a strong national economy would brighten the outlook for a sustained recovery. For growth to accelerate, the Silicon Valley waits for the country to navigate the fiscal cliff so that uncertainty is removed from the recovery equation. Additionally, the nation waits for Europe to get their financial house in order to reduce the possibility of worldwide economic tremors. Regardless of your point of view, everyone waits for the tonic that will quicken the pace and move the economy beyond the recovery and into expansion.

In the Silicon Valley commercial real estate sector, leasing and user sale activity, although not exceptional, has been mercifully consistent in 2012 and the third quarter was no exception. Statistically speaking, the quarterly variance in gross absorption for 2012 has not deviated beyond 10% from one quarter to the next. The 5.81 million square feet of gross absorption for the third quarter is between the high of 5.99 million square feet of activity in Q1 and the low of 5.40 million square feet of demand in Q2.

While not reflected in the gross absorption numbers above, the third quarter also fostered a tremendous amount of pre-leasing and build-to-suit activity. All totaled, Colliers tracked 1.21 million square feet of signed pre-leasing and build-to-suit deals during the quarter, all in the office sector. Including this pending absorption activity for buildings not yet complete, third quarter gross absorption swells to 7.03 million square feet. Statistically, Colliers takes a conservative approach to recording build-to-suit absorption. By definition, net absorption reflects “change in occupancy,” which cannot be measured until a user takes possession of its premises. Since Colliers does not add new buildings to its database until they are complete, gross absorption also cannot officially be recorded until the new construction becomes part of the building base. This approach more closely represents industry-accepted definitions for gross and net absorption.

The commercial real estate market in Silicon Valley continued to see substantial net absorption during the third quarter, posting an occupancy gain in excess of one million square feet. Silicon Valley’s commercial real estate market has now produced sizable occupancy gains in three out of the last four quarters. Ignoring the occupancy loss created by Solyndra in Q1, Silicon Valley would be on a roll of six straight quarters of positive net absorption. This healthy addition to occupancy is also measured by the Valley’s plummeting space availability rate, which dropped from 13.5% at mid-year to 13.1% at the end of Q3. On a square-foot basis, there is 41.10 million square feet of available office, R&D, industrial and warehouse space in Silicon Valley, a total that was reduced by 1.32 million square feet during the most recent quarter.

No matter how you slice it, the Silicon Valley commercial real estate market is one of the healthiest in the nation. Driven by solid job growth and as evidenced by the sizable demand for planned and newly constructed projects, the Silicon Valley is ready and waiting for the nation to step on the accelerator. So the bigger question becomes, is the Valley on the cusp of a larger expansion or is it waiting for Godot?

Q3 2012 | SILICON VALLEY

Q2 2012 Q3 2012

Availability Rate 13.45% 13.06%

Gross Absorption 5,397,536 SF 5,814,743 SF

Net Absorption 1,457,405 SF 1,003,117 SF

MARKET INDICATORS

SILICON VALLEY AVAILABILITY

SILICON VALLEY GROSS ABSORPTION

OFFICE Warehouse

R&D

Industrial

$0.00

$1.00

$2.00

$3.00

$4.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

$0.00

$0.50

$1.00

$1.50

$2.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

0.00%

3.00%

6.00%

9.00%

12.00%

All

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

18.00%

Vacancy Rate Availability Rate

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

3

4

5

1

2

0

R&D O�ce Industrial Warehouse

Q1-11

Q2-11

Q3-11

Q4-12

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Vacancy Rate Availability RateAvg. Starting Rent

Vacancy Rate Availability RateAvg. Starting RentVacancy Rate Availability RateAvg. Starting Rent


Squa

re F

eet i

n M

illio

ns

OFFICE Warehouse

R&D

Industrial

$0.00

$1.00

$2.00

$3.00

$4.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

$0.00

$0.50

$1.00

$1.50

$2.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

0.00%

3.00%

6.00%

9.00%

12.00%

All

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

18.00%


Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

3

4

5

1

2

0


Q1-11

Q2-11

Q3-11

Q4-12

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10




Squa

re F

eet i

n M

illio

ns

Silicon Valley’s R&D sector wandered into the summer doldrums during the third quarter with gross absorption dropping below the 2.0-million-square-foot mark for the first time since the third quarter of 2010. The 1.87 million square feet of demand posted in Q3 was 25.8% less than the 2.52 million square feet reported in Q2 and 28.0% less than the ten-year average for R&D gross absorption in the Silicon Valley. Year-to-date, R&D gross absorption totals 7.65 million square feet. Given the overall health of the Silicon Valley commercial real estate market and the emphasis in the office sector, this decrease is not a surprise. We anticipated various statistical fits and starts for R&D, with an underlying positive, albeit unhurried, trend. At the current run rate, R&D gross absorption will finish the year at just over the ten-million-square-foot mark; higher than the total demand posted in 2008, 2009 or 2010.

R&D available space continues to decline, with the current inventory measuring 21.81 million square feet at Q3 compared to 22.26 million square feet at mid-year. On a percentage basis, the third quarter available space rate amounts to 13.8% versus 14.1% for the previous quarter. Since the beginning of the year the availability rate has dropped 147 basis points or 2.38 million square feet, and there have now been nine straight quarterly declines in available R&D space.

Net absorption for Silicon Valley’s R&D sector was essentially a wash for Q3, registering a positive 38,823 square feet. Although the

occupancy gain was minor, it is a gain nonetheless and represents the fourth straight quarter of occupancy gains in the R&D sector.

The amount of R&D preimproved or “rollover” space that came available during the year’s third quarter increased slightly to 1.83 million square feet, up from 1.64 million square feet in Q2, an increase of 11.7%. Overall, the rate at which R&D space is being vacated has decreased significantly. In three of the last four quarters, less than 2.0 million square feet of R&D space came onto the market each quarter. Prior to that,

the pipeline of R&D “rollover” space coming to market was significantly greater than 2.0 million square feet per quarter for 12 straight quarters.

San Jose, Sunnyvale, Santa Clara, Fremont, and Mountain View, accounted for over 70% of the R&D leasing and user-sale activity in Q3. San Jose, the largest R&D submarket, led all cities with 493,592 square feet of gross absorption in Q3, a 24.0% decline from Q2’s 649,418 square feet of demand. Similarly, the overall R&D market experienced a decline of the same magnitude during the quarter. San Jose was still able to squeeze out a 94,119-square-foot R&D occupancy gain for the quarter, extending its streak of positive net absorption to four straight quarters. Significant

transactions included Synaptics purchase of three buildings on McKay Drive totaling 151,247 square feet and the Santa Clara County Department of Child Support lease of 83,841 square feet on Ridder Park Drive.

The Milpitas R&D submarket also had a noteworthy quarter with 424,521 square feet of gross absorption, trailing only San Jose in activity. Despite the strong demand during the quarter, Milpitas was unable to get into the black and had negative net absorption of 31,008 square feet. Contributing to the negative net absorption, SanDisk vacated some of its sublease space during the quarter. This was part of SanDisk’s move to its new Milpitas headquarters, which was purchased in Q1 2012. During the quarter Soladigm signed a lease for 77,200 square feet on Milpitas Boulevard, and Elo Touch Systems

signed for 73,378 square feet on Murphy Ranch Road. Also, Pericom Semiconductor purchased an 85,040-square-foot building on Barber Lane.

R&D

R&D LEASING & SALES ACTIVITY

SELECTED COLLIERS INTERNATIONAL TRANSACTIONS - Q3 2012

PROPERTY ADDRESS SQUARE FEET LANDLORD/SELLER TENANT/BUYER TYPE

3000-3030 Orchard Parkway, San Jose 126,244 DivcoWest Properties AEW Capital Management, LP Investment Sale

40931-40963 Encyclopedia Circle, Fremont 91,197 CW Capital Asset Management, Inc. Sycamore Canyon Farms, LP Investment Sale

195 S. Milpitas Boulevard, Milpitas 77,200 Bryan Family Partnership Soladigm Lease

660 N. McCarthy Boulevard, Milpitas 53,284 The Irvine Company Varian Medical Systems Renewal

1215 Bordeaux Drive, Sunnyvale 26,615 Headland Realty Corp Nissan North America Lease

235 Charcot Avenue, San Jose 14,088 Invesco Real Estate Comba Telecom, Inc. Lease

R&D AVAILABILITY & RENT TRENDS

OFFICE Warehouse

R&D

Industrial

$0.00

$1.00

$2.00

$3.00

$4.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

$0.00

$0.50

$1.00

$1.50

$2.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

0.00%

3.00%

6.00%

9.00%

12.00%

All

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

18.00%


Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

3

4

5

1

2

0


Q1-11

Q2-11

Q3-11

Q4-12

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10




Squa

re F

eet i

n M

illio

ns

R&D available space continues to decline, with the current inventory measuring 21.81 million square feet at Q3 compared to 22.26 million square feet at mid-year.

P. 2 | COLLIERS INTERNATIONAL

RESEARCH & FORECAST REPORT | Q3 2012 | SILICON VALLEY

Weighted average starting rents declined 6.1% during the quarter from $1.31 per square foot NNN in Q2 to $1.23 per square foot NNN in Q3. For the year, R&D weighted average starting rents have been erratic after spiking in the first quarter of 2012. The variability is characteristic of a market trying to transition from recovery to expansion and it is representative of the wide divergence of R&D space and submarkets found in Silicon Valley. The balance of the year bodes well for the R&D sector as the recovery finds its legs and extends to a more broad-based constituency. As that happens, R&D demand and rents are likely to continue to increase well into 2013.

OFFICEAfter taking a small respite in the second quarter, the Silicon Valley office sector resumed at a scorching pace, producing over two million-square-feet of gross absorption during the third quarter. When the smoke cleared, activity in the office sector increased 62.2% from the previous quarter, registering 2.19 million square feet of gross absorption in Q3 compared to the 1.35 million square feet of gross absorption posted in Q2.

Beyond the 2.19 million square feet of office demand that is reported in the Q3 stats, Colliers also measured an additional 1.21 million square feet of signed office leases ascribed to buildings that are currently under construction or part of build-to-suit agreements. They are as follows: Lab126 signed for 357,481 square feet on a building that is currently under construction on

Enterprise Way in Sunnyvale; Dell and Arista signed for 149,000 square feet each at the Irvine Company’s Santa Clara Gateway project which is currently under construction and LinkedIn entered a build-to-suit agreement with DiNapoli Companies for a 556,362-square-foot campus on Mathilda Avenue in Sunnyvale.

Assuming that these new projects are built as planned, they will be added to the building base upon completion, whereupon the new occupancy will be recorded and added to Colliers’ gross and net absorption statistics.

However, the impact of the inking of these and other build-to-suit deals is sweeping the Valley today and should be considered an integral part

of the demand we are experiencing, particularly in the office sector.

The increase in activity translated to sizable occupancy gains for the Silicon Valley office sector. After a modest occupancy loss in Q2, the office sector rebounded in Q3 with 713,952 square feet of positive net absorption, representing the highest quarterly office occupancy gain since Q4 2001. These fluctuations in occupancy quarter over quarter highlight the precarious nature of the market recovery and its ongoing dependency upon “big deals.”

The total inventory of available office space declined by 678,985 square feet in the third quarter to 10.37 million square feet from the second quarter’s reported 11.07 million square feet available. The office availability rate followed suit, decreasing from 17.9% in Q2 to 16.7% in Q3, the lowest office availability rate in four years.

After the second quarter lull, office activity increased across the board during Q3. San Jose, Santa Clara, Palo Alto, Cupertino and Sunnyvale, accounted for more than 80% of the total office demand during the quarter. On a net absorption basis, all five cities recorded occupancy gains for the quarter.

Sunnyvale recorded positive net absorption measuring 359,935 square feet—the largest occupancy

gain for any Silicon Valley city during the quarter. Sunnyvale’s gross absorption weighed in at a strong 419,220 square feet for the quarter. Most

Beyond the 2.19 million square feet of office demand that is reported in the Q3 stats, Colliers also measured an

additional 1.21 million square feet of signed office leases ascribed to buildings that are currently under construction

or part of build-to-suit agreements.

OFFICE AVAILABILITY & RENT TRENDS

OFFICE LEASING & SALES ACTIVITY



5300 Stevens Creek, San Jose 52,040 Carlye Group Apple Lease

525 Almanor Avenue, Fremont 45,501 Menlo Equities Fiserv Solutions, Inc. Lease

501 Macara Avenue, Sunnyvale 16,278 RREEF Panasas, Inc. Lease

2033 Gateway Place, San Jose 15,227 Equity Office Properties Lumenis, Inc. Lease

3945 Freedom Circle, Santa Clara 13,229 Shorenstien IP Value Lease

10001 De Anza Boulevard, Cupertino 12,793 Four Corners Properties Seagate Technologies Lease

OFFICE Warehouse

R&D

Industrial

$0.00

$1.00

$2.00

$3.00

$4.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

$0.00

$0.50

$1.00

$1.50

$2.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

0.00%

3.00%

6.00%

9.00%

12.00%

All

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

18.00%


Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

3

4

5

1

2

0


Q1-11

Q2-11

Q3-11

Q4-12

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10




Squa

re F

eet i

n M

illio

ns


of Sunnyvale’s activity for Q3 centers on Lab126. Besides leasing the 357,481-square-foot building that is currently being constructed, they also leased 224,492 square feet in a recently completed building on Enterprise Way in the same office park. All in, Lab126 will occupy more than 580,000 square feet of office space in Sunnyvale.

The San Jose and Santa Clara submarkets both posted office gross absorption of more than a half-million square feet in Q3, tallying 514,350 square feet and 567,929 square feet respectively. The strong office demand resulted in an occupancy gain of 122,379 square feet in San Jose and a gain of 71,129 square feet in Santa Clara. Significant office transactions for San Jose during the quarter included Apple’s 52,040-square-foot lease at 5300 Stevens Creek Boulevard. The most significant office transactions in Santa Clara for the quarter included Palo Alto Networks’ 301,163-square- foot two-building lease on Great America Parkway and EMC2’s 94,000-square-foot lease on Mission College Boulevard.

It has been an inconsistent few quarters when it comes to measuring average starting rents of office deals. Weighted average office rents in the Silicon Valley soared nearly 40% to an average start rate of $3.19 per square foot full service in Q3 after a dip to $2.29 per square foot full service in Q2. The Silicon Valley office market witnessed a similar spike in rents in the third quarter of 2011, which was also attributable to a few, large, Class A office deals completed in the quarter. When the dust settles

and more deals are factored into longer-term averages, Colliers expects average starting rents in the office sector to be around $3.00 per square foot full service. Paradoxically, a stronger economy might drive that figure down as small businesses get healthier and greater activity results in the Class B office sector and those deals get factored in the equation.

INDUSTRIALSilicon Valley’s industrial sector continued at a steady pace, generating 1.05 million square feet of industrial gross absorption in Q3—

15.3% higher than the 909,198 square feet of gross absorption posted in Q2. The steady pace of the industrial sector’s demand is in

contrast to the more wild swings experienced in other Silicon Valley commercial real estate sectors. Barring any shocks, industrial gross absorption will finish the year right at Colliers’ forecasted 3.50 million square feet of annualized activity.

The industrial sector contributed 274,439 square feet of occupancy gain during the third quarter. In conjunction with 400,948 square feet of positive net absorption in Q2, the industrial sector has strung together two very strong quarters of occupancy gains. If the

industrial market is able to close out the fourth quarter with similar results, it will signal to the marketplace that the industrial segment is back on solid footing.

During the third quarter, the availability rate for industrial space decreased from 9.2% to 8.7% at the end of September. Accordingly, the supply of available industrial space decreased in the third quarter to 4.92 million square feet from 5.21 million square feet at the end of the second quarter. Significantly, available space is back below the 5.0 million square foot level after getting bumped above that threshold in Q1 as a result of all the space that came to the market in the wake of Solyndra’s bankruptcy.

As was the case in Q2, four of the five largest industrial submarkets posted occupancy gains in the third

quarter. San Jose, with the Valley’s largest industrial building base, posted 72,724 square feet of positive net absorption for the quarter

INDUSTRIAL AVAILABILITY & RENT TRENDS

INDUSTRIAL LEASING & SALES ACTIVITY



2500 De La Cruz Boulevard, Santa Clara 202,000 Graphic Packaging One Workplace User Sale

680 Kifer Road, Sunnyvale 40,000 Home Depot Tire Centers, Inc. Lease

999 Mabury Road, San Jose 24,000 Mabury Road Property, LP River City Building Supply Renewal

1488 Seareel Lane, San Jose 16,161 March Properties, LLC King Street Printing Lease

1060 Commercial Street, San Jose 16,128 CSBS, LLC Golden State Flooring Lease

398 Railroad Court, Milpitas 14,400 IndCor Properties Advanced Electroplating Renewal

Barring any shocks, industrial gross absorption will finish the year right at Colliers’ forecasted 3.50 million square

feet of annualized activity.

OFFICE Warehouse

R&D

Industrial

$0.00

$1.00

$2.00

$3.00

$4.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

$0.00

$0.50

$1.00

$1.50

$2.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

0.00%

3.00%

6.00%

9.00%

12.00%

All

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

18.00%


Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

3

4

5

1

2

0


Q1-11

Q2-11

Q3-11

Q4-12

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10




Squa

re F

eet i

n M

illio

ns



and now has accumulated occupancy gains in three straight quarters. San Jose’s industrial occupancy gain now totals 313,188 square feet for the year. Industrial gross absorption for San Jose dipped slightly in Q3, totaling 284,388 square feet compared to 349,810 square feet measured in the previous quarter. San Jose was helped along by Versgrove Moving leasing the warehouse portion of an industrial building on Lenfest Road totaling 51,600 square feet.

Santa Clara posted 310,143 square feet of industrial gross absorption for the quarter, a 71% increase from 180,924 square feet of new demand measured in Q2. Despite this healthy deal flow, Santa Clara experienced almost no change in occupancy, recording a small net absorption loss of 4,439 square feet. Notable Q3 deals include One Workplace’s purchase of a 202,000- square-foot building on De La Cruz Boulevard. The building was parceled out from part of a larger industrial complex and will be rehabbed into a warehouse use by the buyer.

Sunnyvale’s industrial gross absorption totaled 225,956 square feet, a record for that submarket. An occupancy gain of 220,497 square feet accompanied the record demand. Sunnyvale benefited from Fortinet’s acquisition of a 164,099- square-foot-building on Kifer Road, and Tire Centers Inc.’s 40,000-square-foot industrial lease, also on Kifer Road.

Starting rents for industrial deals completed in the third quarter have been remarkably flat for

the year. During the quarter, weighted average starting rents decreased slightly to $0.63 per square foot NNN from $0.65 per square foot NNN in Q2, a 3.1% decline. Looking at industrial starting rents over the course of the year, rates have not changed. The $0.63 per square foot NNN rate is right where we started in 2012.

WAREHOUSEThe Silicon Valley’s warehouse sector managed to take two steps forward in the third quarter of 2012 by registering gross absorption of 701,909 square feet, a 14.7% increase from the 611,710

square feet of gross absorption reported in Q2. The story behind the resurgence of warehouse demand is significant—it was the biggest quarter

for the warehouse sector in two years and demand in this category has now been on the upswing in back-to-back quarters for the first time in two years as well.

Although warehouse gross absorption figures were bullish, net absorption did not follow suit. As a result, the third quarter actually produced a small warehouse occupancy loss totaling 24,097 square feet. The negative net absorption comes on the heels of a 291,572-square-foot occupancy gain in Q2. As a result, the warehouse availability rate increased to 10.4% in the third quarter, up from

10.0% the prior quarter. That translates to 3.98 million square feet of available warehouse space in Q3, up from the 3.88 million square feet of available warehouse space in Q2.

The seeming inconsistency between gross and net absorption in the warehouse sector is explained by the fact that the 701,909 square feet of new activity was offset by 725,187 square feet of existing warehouse space that came available during the third quarter. This new supply more than doubled the 320,138 square feet that was added to available supply in Q2. Although the 725,187 square feet of rollover space for the quarter is not elevated from a historical perspective (the ten-year average is 710,387 square feet per quarter) the amount is difficult for the sector to bear. The bottom line is that despite promising signs, warehouse activity varies widely

from quarter to quarter in Silicon Valley and that pattern is likely to continue until the economy is humming along on all cylinders.

WAREHOUSE AVAILABILITY & RENT TRENDS

WAREHOUSE LEASING & SALES ACTIVITY



42505 Christy Street, Fremont 75,963 BIT Holdings 67, Inc. 3 Way Logistics Lease

382 Laurelwood Road, Santa Clara 50,860 Johnson Family Trust Leadman Electronics USA User Sale

2207 Ringwood Avenue, San Jose 32,376 Chavez Management Group, Inc. MacBeath Hardwood Company Renewal

1380 Piper Drive, Milpitas 25,000 Milpitas Station Venture, LLP ME2 Renewal

1919 Monterey Road, San Jose 19,240 Theresa Hui Champion's Academy Lease

46025 Warm Springs Boulevard, Fremont 15,956 Quinn Family Trust Arrow Recovery Group Renewal

The seeming inconsistency between gross and net absorption in the warehouse sector is explained by the fact that the 701,909 square feet of new activity was offset by

725,187 square feet of existing warehouse space that came available during the third quarter.

OFFICE Warehouse

R&D

Industrial

$0.00

$1.00

$2.00

$3.00

$4.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

$0.00

$0.50

$1.00

$1.50

$2.00

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

0.00%

3.00%

6.00%

9.00%

12.00%

All

0.00%

3.00%

6.00%

9.00%

12.00%

15.00%

18.00%


Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

3

4

5

1

2

0


Q1-11

Q2-11

Q3-11

Q4-12

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10

Q1-11

Q2-11

Q3-11

Q4-11

Q1-12

Q2-12

Q3-12

Q4-10




Squa

re F

eet i

n M

illio

ns



COLLIERS INTERNATIONAL | SAN JOSE

450 West Santa Clara StreetSan Jose, CA 95113United StatesTEL +1 408 282 3800FAX +1 408 292 8100CA License No. 00490878

522 offices in 62 countries on 6 continentsUnited States: 147Canada: 37Latin America: 19Asia Pacific: 201EMEA: 118• $1.8 billion in annual revenue

• 1.25 billion square feet under management

• Over 12,300 professionals

This report and other research materials may be found on our website at www.colliers.com/sanjose. This quarterly report is a research document of Colliers International – San Jose, CA. Questions related to information herein should be directed to the Research Department at +1 408 282 3800. Information contained herein has been obtained from sources deemed reliable and no representation is made as to the accuracy thereof. Colliers International is the third-largest commercial real estate services company in the world with 12,300 professionals operating out of more than 522 offices in 62 countries. ©2012 Colliers International

www.colliers.com/sanjose

Accelerating success.

MANAGING PARTNER

Jeff Fredericks, siorManaging [email protected] +1 408 282 3801CA License No. 00802610

RESEARCHER

Terry WangResearch Project [email protected] +1 408 282 3898

When that happens, we will see more warehousers needing inventory storage and more alternative users utilizing our diminishing supply of warehouse structures.

Santa Clara was the recipient of the only 100,000- square-foot warehouse deal of the third quarter when Apple leased 134,160 square feet on Mead Avenue. The deal represented over half of the 205,260 square feet gross absorption in Santa Clara for the quarter. Despite notching the sector’s largest deal of the quarter, there was not enough activity otherwise to prevent Santa Clara from registering a warehouse occupancy loss of 22,000 square feet during the period.

The largest warehouse submarket, San Jose, had the highest warehouse demand for the quarter at 235,809 square feet. Accompanying the solid quarterly demand was an occupancy gain of 50,408 square feet—the first quarterly positive net absorption for San Jose this year. The largest warehouse deal in San Jose for the quarter was Freehand Foods’ 65,173-square-foot lease on Las Plumas Avenue.

Fremont has quietly put together three straight quarters of warehouse occupancy gains. In the third quarter, Fremont posted a small but welcomed 15,247 square feet of positive net absorption. Fremont’s warehouse gross absorption, which has now surpassed the 100,000-square-foot threshold in three straight quarters, tallied 137,803 square feet. The largest warehouse deal in Fremont was Three Way Logistics’ lease of 75,963 square feet on Christy Street.

Starting rents for warehouse deals completed in Q3 jumped $0.06 from $0.42 per square foot NNN in Q2 to $0.48 per square foot NNN in Q3. The increase was a result of some fairly aggressive starting rents posted in the deals that got done. While landlords are pushing rents in this sector, it will take more net absorption to generate a sustainable trend. Colliers still anticipates that average starting rents in the warehouse sector will trail below the $0.45 NNN mark for the year.

UNDERSTANDING ABSORPTION

Change in Availability: This measurement is simply the difference between the amounts of space available at the end of one period to the next. The table below shows that total available space decreased by 1,319,217 square feet in the year’s Third Quarter. Note that “change in availability” includes adjustments for space that is “taken off the market”. Space “taken off the market” is not a factor in net absorption measurements.

Total Available end of 2Q12 42,415,890Plus: Vacant & Occupied Space

that came available in 3Q12 3,984,290Plus: New Shell added in 3Q12 52,5002Q12 Available + Newly Available in 3Q12 46,452,680Less: 3Q12 Gross Absorption -5,814,743Less: 3Q12 Adjustments/Taken off Market 458,736Total Available end of 3Q12 41,096,673

Colliers uses several measurements to track market conditions and deal flow. While related, the formulas to arrive at these measurements differ. Using the results of the most recent quarter, here is how Colliers measures change in availability, net absorption and effective net absorption.

Net Absorption: Net absorption measures the change in occupied space from one period to the next. In this measurement, it is important to distinguish that a building may be “available”, but not vacant (often the case in a sublease situation, for example). Therefore, occupancy is not reduced (negative net absorption) until the space is vacated, and sometimes that does not happen until the space is leased, creating a net absorption “wash” for the deal and for that particular period. New Vacant Space that came available 3Q12 -1,607,829Previously Available Space that was vacated in 3Q12 -3,203,7973Q12 Total Vacant added (Occupancy Loss) -4,811,626 3Q12 Gross Absorption (occupancy gain) 5,814,7433Q12 Net Absorption (change in Occupancy) 1,003,117

Effective Net Absorption: In 2003, Colliers created a measurement of “effective net absorption”. Effective net absorption uses the same formula as the net absorption formula, except that it treats any space that comes available as if it is vacant, whether it is or it isn’t. The purpose of the measurement is to get a better “real time” gauge of occupancy flow in and out of the market, acknowledging that space that is available for lease is likely to be vacated shortly and underutilized presently.

New Vacant Space that came available 3Q12 -1,607,829Occupied Space that came available 3Q12 -2,376,4613Q12 Total Available added -3,984,290 3Q12 Gross Absorption 5,814,7433Q12 Effective Net Absorption 1,830,453




MARKET COMPARISONS

OFFICE MARKET

CLASS BLDGSTOTAL

INVENTORY SQ FT

DIRECT VACANT

SUBLEASE VACANT

DIRECT OCCUPIED

SUBLEASE OCCUPIED

TOTAL AVAILABLE

SQ FT

RATE Q3-2012

RATE Q2-2012

NET ABSORPTIONQ3-2012 YTD

COMPLETED Q3-2012

UNDER CONSTR

FSWTD AVGASKING

CAMPBELL / LOS GATOS

A 19 1,123,609 194,814 1,443 39,651 13,226 249,134 22.2% 19.6% (12,812) 47,976 - 55,510 $2.88 B 88 1,705,230 143,980 - 22,628 22,621 189,229 11.1% 11.6% 8,905 50,119 - - $2.20 C 13 172,155 23,408 - 18,000 - 41,408 24.1% 31.2% 12,240 18,347 - - $1.63 Total 120 3,000,994 362,202 1,443 80,279 35,847 479,771 16.0% 15.7% 8,333 116,442 - 55,510 $2.61

CUPERTINO / SARATOGA

A 8 734,525 10,003 3,347 59,384 14,363 87,097 11.9% 12.4% 453 7,101 - - $4.12 B 83 2,530,294 39,171 1,197 3,324 12,937 56,629 2.2% 2.7% 18,822 51,510 - - $2.88 C 22 290,394 2,968 - - - 2,968 1.0% 1.5% 1,246 6,133 - - $2.15 Total 113 3,555,213 52,142 4,544 62,708 27,300 146,694 4.1% 4.6% 20,521 64,744 - - $3.67

FREMONT / MILPITAS

A 15 805,847 249,183 - 26,976 - 276,159 34.3% 36.4% 6,146 10,962 - - $1.90 B 39 1,247,290 294,863 - 13,784 3,351 311,998 25.0% 26.3% 21,434 5,774 - - $1.76 C 35 636,178 50,024 - - - 50,024 7.9% 9.0% 7,173 5,176 - - $1.53 Total 89 2,689,315 594,070 - 40,760 3,351 638,181 23.7% 25.2% 34,753 21,912 - - $41.81

GILROY / MORGAN HILL

A 17 471,036 164,990 900 - - 165,890 35.2% 48.7% (56,652) (39,026) - - $1.65 B 7 120,088 27,513 - - - 27,513 22.9% 22.9% - 5,063 - - $1.06 C 29 285,730 41,853 - 3,300 - 45,153 15.8% 15.8% - 4,832 - - -Total 53 876,854 234,356 900 3,300 - 238,556 27.2% 34.4% (56,652) (29,131) - - $1.63

LOS ALTOS

A 10 250,807 25,315 2,979 11,924 - 40,218 16.0% 12.1% 1,320 13,634 13,484 - $4.76 B 17 326,781 61,182 2,914 28,333 - 92,429 28.3% 35.7% 13,059 19,773 - - $3.91 C 38 472,356 13,675 2,400 3,125 - 19,200 4.1% 4.1% (10,571) (7,496) - - $2.98 Total 65 1,049,944 100,172 8,293 43,382 - 151,847 14.5% 15.9% 3,808 25,911 13,484 - $4.14

MOUNTAIN VIEW

A 22 2,196,395 30,519 7,815 36,160 18,941 93,435 4.3% 6.3% 28,926 1,236 - - $5.14 B 45 1,085,736 109,732 15,794 32,599 18,913 177,038 16.3% 14.7% (28,961) (2,542) - - $3.65 C 44 476,518 47,648 3,000 - - 50,648 10.6% 15.8% 18,666 5,771 - - $2.80 Total 111 3,758,649 187,899 26,609 68,759 37,854 321,121 8.5% 10.0% 18,631 4,465 - - $3.97

PALO ALTO

A 65 2,845,482 225,404 45,264 47,639 272,244 590,551 20.8% 13.5% 58,493 29,105 39,016 76,482 $5.17 B 105 2,406,015 95,626 4,323 61,503 13,226 174,678 7.3% 8.5% 72,582 38,372 - - $4.30 C 83 929,756 42,480 6,672 6,598 10,284 66,034 7.1% 7.0% 40 (24,432) - - $4.17 Total 253 6,181,253 363,510 56,259 115,740 295,754 831,263 13.4% 10.6% 131,115 43,045 39,016 76,482 $4.99 SAN JOSE

A 84 11,342,644 2,175,487 135,197 234,443 170,440 2,715,567 23.9% 25.1% 129,845 80,466 - - $2.68 B 239 8,575,498 1,352,276 18,247 70,117 77,389 1,518,029 17.7% 16.8% (21,377) (110,585) - - $1.88 C 187 4,193,337 604,741 12,905 31,767 - 649,413 15.5% 15.8% 13,911 (10,155) - - $1.51 Total 510 24,111,479 4,132,504 166,349 336,327 247,829 4,883,009 20.3% 20.5% 122,379 (40,274) - - $2.32 SANTA CLARA

A 33 4,738,104 855,014 11,600 6,740 125,137 998,491 21.1% 22.2% 136,281 243,532 - 429,000 $3.30 B 129 3,969,247 669,940 87,677 9,215 - 766,832 19.3% 22.4% (77,977) 15,542 - - $2.19 C 40 660,949 139,899 - 2,857 - 142,756 21.6% 23.2% 12,825 24,976 - - $1.59 Total 202 9,368,300 1,664,853 99,277 18,812 125,137 1,908,079 20.4% 22.4% 71,129 284,050 - 429,000 $2.74 SUNNYVALE

A 37 5,616,475 463,046 18,100 29,122 1,921 512,189 9.1% 14.3% 282,606 381,198 - 457,481 $3.90 B 57 1,349,562 140,784 - 5,513 3,706 150,003 11.1% 20.1% 80,599 (6,299) - - $2.39 C 24 471,440 125,414 - - - 125,414 26.6% 30.4% (3,270) 5,738 - - $1.96 Total 118 7,437,477 729,244 18,100 34,635 5,627 787,606 10.6% 16.3% 359,935 380,637 - 457,481 $3.27

SILICON VALLEY TOTALS

A 310 30,124,924 4,393,775 226,645 492,039 616,272 5,728,731 19.0% 20.2% 574,606 776,184 52,500 1,018,473 $3.22 B 809 23,315,741 2,935,067 130,152 247,016 152,143 3,464,378 14.9% 15.9% 87,086 66,727 - - $2.25 C 515 8,588,813 1,092,110 24,977 65,647 10,284 1,193,018 13.9% 14.9% 52,260 28,890 - - $1.82 Total 1,634 62,029,478 8,420,952 381,774 804,702 778,699 10,386,127 16.7% 17.8% 713,952 871,801 52,500 1,018,473 $2.79

QUARTERLY COMPARISON AND TOTALS

3Q-12 1,634 62,029,478 8,420,952 381,774 804,702 778,699 10,386,127 16.7% 17.8% 713,952 871,801 52,500 1,018,473 $2.79 2Q-12 1,631 61,991,189 9,119,995 490,279 1,014,725 440,113 11,065,112 17.8% 17.0% (117,772) 157,849 306,900 950,571 $2.80 1Q-12 1,628 61,524,289 8,725,921 621,168 760,010 356,560 10,463,659 17.0% 17.7% 275,621 275,621 - 460,980 $2.60 4Q-11 1,630 61,592,727 9,057,155 783,190 817,627 219,949 10,877,921 17.7% 19.4% 584,091 2,058,284 - 623,536 $2.57 3Q-11 1,631 61,619,625 9,867,657 805,687 1,031,023 235,214 11,939,581 19.4% 22.3% 512,438 1,474,193 - 599,968 $2.57



MARKET COMPARISONS

R&D, INDUSTRIAL & WAREHOUSE MARKETS

CLASS BLDGSTOTAL

INVENTORY SQ FT

DIRECT VACANT

SUBLEASE VACANT

DIRECT OCCUPIED

SUBLEASE OCCUPIED

TOTAL AVAILABLE

SQ FT

RATE Q3-2012

RATE Q2-2012

NET ABSORPTIONQ3-2012 YTD

COMPLETED Q3-2012

UNDER CONSTR

NNNWTD AVGASKING

CAMPBELL

R&D 66 1,353,529 131,718 - 40,000 20,010 191,728 14.2% 13.4% 4,000 38,908 - - $1.57 IND 44 595,685 38,649 - 22,881 - 61,530 10.3% 9.4% (8,272) 6,436 - - $1.27 TOTAL 110 1,949,214 170,367 - 62,881 20,010 253,258 13.0% 12.3% (4,272) 45,344 - - $1.56

CUPERTINO

R&D 50 3,439,813 - - - - - 0.0% 0.0% - - - - - TOTAL 50 3,439,813 - - - - - 0.0% 0.0% - - - - -

FREMONT

R&D 346 18,767,569 4,182,623 162,638 241,548 153,489 4,740,298 25.3% 25.3% (85,614) (185,236) - - $0.81 IND 355 9,113,518 1,378,861 30,688 118,825 - 1,528,374 16.8% 16.2% 17,691 (845,748) - - $0.73 WSE 50 7,638,159 688,516 - 76,703 99,492 864,711 11.3% 11.6% 15,247 328,579 - - $0.48 TOTAL 751 35,519,246 6,250,000 193,326 437,076 252,981 7,133,383 20.1% 20.0% (52,676) (702,405) - - $0.76

GILROY

R&D 9 373,694 143,299 - - - 143,299 38.3% 38.3% - (40,083) - - $0.72 IND 73 1,357,937 245,397 - - - 245,397 18.1% 18.3% 3,587 1,297 - - $0.57 WSE 18 3,224,101 139,162 - 162,830 33,310 335,302 10.4% 9.4% - (14,821) - - $0.41 TOTAL 100 4,955,732 527,858 - 162,830 33,310 723,998 14.6% 14.0% 3,587 (53,607) - - $0.59

LOS GATOS

R&D 19 448,159 13,893 - - 27,833 41,726 9.3% 11.7% 10,505 13,033 - - $1.78 TOTAL 19 448,159 13,893 - - 27,833 41,726 9.3% 11.7% 10,505 13,033 - - $1.78

MILPITAS

R&D 228 13,784,996 1,813,675 107,368 156,593 86,842 2,164,478 15.7% 14.4% (31,008) 509,006 - - $0.95 IND 118 2,943,569 240,833 17,323 51,137 - 309,293 10.5% 10.2% (29,076) 20,453 - - $0.80 WSE 37 4,761,248 419,181 59,849 167,842 36,595 683,467 14.4% 9.2% (67,752) (41,181) - - $0.48 TOTAL 383 21,489,813 2,473,689 184,540 375,572 123,437 3,157,238 14.7% 12.7% (127,836) 488,278 - - $0.84

MORGAN HILL

R&D 62 2,688,925 443,731 - - - 443,731 16.5% 19.7% 19,052 13,665 - - $0.71 IND 76 1,882,576 203,103 - 14,270 - 217,373 11.5% 10.9% 2,052 14,517 - - $0.79 WSE 5 384,880 - - - - - 0.0% 0.0% - - - - - TOTAL 143 4,956,381 646,834 - 14,270 - 661,104 13.3% 14.8% 21,104 28,182 - - $0.74 MOUNTAIN VIEW

R&D 274 13,971,801 418,930 68,894 173,749 39,383 700,956 5.0% 5.1% (79,012) 111,809 - - $2.03 IND 149 2,704,073 84,452 - - - 84,452 3.1% 5.0% 12,715 (17,893) - - $1.12 TOTAL 423 16,675,874 503,382 68,894 173,749 39,383 785,408 4.7% 5.1% (66,297) 93,916 - - $1.96 PALO ALTO

R&D 59 10,292,315 107,871 37,234 16,800 99,610 261,515 2.5% 2.4% (24,441) 7,797 - 111,100 $2.30 TOTAL 59 10,292,315 107,871 37,234 16,800 99,610 261,515 2.5% 2.4% (24,441) 7,797 - 111,100 $2.30 SAN JOSE

R&D 643 47,041,193 6,578,778 654,347 334,638 101,582 7,669,345 16.3% 16.8% 94,119 753,829 - - $1.15 IND 1,081 22,479,253 1,219,890 39,466 175,252 9,371 1,443,979 6.4% 6.6% 72,724 313,188 - - $0.70 WSE 177 16,146,449 1,098,755 83,462 440,557 25,155 1,647,929 10.2% 10.0% 50,408 (409,021) - - $0.52 TOTAL 1,901 85,666,895 8,897,423 777,275 950,447 136,108 10,761,253 12.6% 12.9% 217,251 657,996 - - $1.04 SANTA CLARA

R&D 376 21,972,346 2,662,792 114,152 261,384 113,123 3,151,451 14.3% 14.1% 55,702 147,464 - - $1.52 IND 613 10,827,576 507,116 41,645 99,499 4,252 652,512 6.0% 6.2% (4,439) (994) - - $0.90 WSE 30 3,229,532 180,075 20,000 38,700 - 238,775 7.4% 12.3% (22,000) 36,800 - - $0.41 TOTAL 1,019 36,029,454 3,349,983 175,797 399,583 117,375 4,042,738 11.2% 11.6% 29,263 183,270 - - $1.46 SUNNYVALE

R&D 509 23,734,965 1,944,486 248,262 76,349 28,858 2,297,955 9.7% 10.8% 75,520 249,424 - - $1.72 IND 183 3,200,714 199,425 3,060 51,786 1,700 255,971 8.0% 16.0% 220,497 224,987 - - $0.99 WSE 35 2,606,972 13,500 - - 90,544 104,044 4.0% 4.0% - 26,183 - - $0.73 TOTAL 727 29,542,651 2,157,411 251,322 128,135 121,102 2,657,970 9.0% 10.8% 296,017 500,594 - - $1.63

SILICON VALLEY TOTALSR&D 2,641 157,869,305 18,441,796 1,392,895 1,301,061 670,730 21,806,482 13.8% 14.1% 38,823 1,619,616 - 111,100 $1.22 IND 2,692 56,405,918 4,234,458 135,082 535,150 15,323 4,920,013 8.7% 9.2% 274,439 (250,726) - - $0.78 WSE 352 38,477,516 2,649,012 163,311 886,632 285,096 3,984,051 10.4% 10.0% (24,097) (73,461) - - $0.52 TOTAL 5,685 252,752,739 25,325,266 1,691,288 2,722,843 971,149 30,710,546 12.2% 12.4% 289,165 1,295,429 - 111,100 $1.10

QUARTERLY COMPARISON AND TOTALS3Q-12 5,685 252,752,739 25,325,266 1,691,288 2,722,843 971,149 30,710,546 12.2% 12.4% 289,165 1,295,429 - 111,100 $1.10 2Q-12 5,695 253,478,172 26,251,296 1,538,039 2,473,403 1,088,040 31,350,778 12.4% 12.8% 1,575,177 1,006,264 118,535 111,100 $1.08 1Q-12 5,695 253,519,637 28,003,464 1,740,619 1,912,268 715,729 32,372,080 12.8% 13.1% (568,913) (568,913) - 118,535 $1.04 4Q-11 5,694 253,390,939 27,526,912 1,824,593 2,881,254 894,922 33,127,681 13.1% 13.5% 978,849 1,198,452 - 118,535 $1.03 3Q-11 5,699 253,921,004 28,705,297 2,147,988 2,817,178 508,099 34,178,562 13.5% 14.7% (236,016) 219,603 - 118,535 $1.01

OFFICESILICON VALLEY RESEARCH & FORECAST REPORT/media/files/marketresearch/unitedstates... ·...

Documents

Transcript of OFFICESILICON VALLEY RESEARCH & FORECAST REPORT/media/files/marketresearch/unitedstates... ·...