Office space leases slowing in Silicon Valley

Posted on Tue, Oct. 25, 2005

Office space leases slowing
BROKERS EXPECT PACE TO PICK UP BY YEAR-END
By Jon Ann Steinmetz
Mercury News

InnoPath Software knew it was time for a bigger office when it started cannibalizing conference rooms, demo rooms and equipment rooms for work space.

The maker of software for managing mobile gadgets like cell phones and PDAs doubled its workforce over the past year and was ``absolutely bursting at the seams'' in its 14,000-square-foot office in San Jose's Alviso neighborhood, said David Sym-Smith, senior vice president of marketing.

The company just moved 130 employees to a new 53,000-square-foot headquarters in Sunnyvale, nearly four times bigger than the previous space, in one of the top leases in Silicon Valley in the third quarter.

The commercial real estate market could use more companies like InnoPath. Vacancies in research-and-development buildings dropped for the sixth consecutive quarter, but the pace of leasing activity slowed noticeably from the first half of the year, according to a recent report by NAI BT Commercial. Brokers, however, are expecting another rush as 2005 winds down.

``Definitely. Definitely. Definitely,'' said Phil Mahoney of Cornish & Carey. ``We're working on a number of things that may well close'' by the end of the year.

The vacancy rate in R&D buildings, the typical one- and two-story offices that make up the bulk of Silicon Valley's building stock, dropped to 20.6 percent in the third quarter from 21 percent in the second quarter and 22.3 percent a year ago, NAI BT Commercial found. And while there were only 25 deals of more than 25,000 square feet, down from 35 in the second quarter, companies still took 565,700 square feet off the market.

Office building vacancies fell for the eighth quarter in a row, dropping to 13.6 percent from 13.7 percent last quarter and 15.3 percent a year ago.

``The third quarter saw more tour activity, but it was somewhat disappointing from a signed-lease standpoint,'' said Drew Arvay, managing partner of NAI BT Commercial's San Jose office. ``There were a lot of people out looking, but not as many actually signed.''

Perhaps more than 10 percent of the valley's 31.7 million square feet of vacant space is obsolete and will probably never be rented, and millions more square feet will be converted to residential use, said broker Erik Doyle of CB Richard Ellis. That, plus a strong demand for Class A buildings -- newer buildings with security and other amenities -- means the market could be healthier than the numbers indicate.

``By the end of the year, we're probably going to see all of the A product gone,'' he said.

The average asking rents increased by a penny for R&D space, to 88 cents a square foot. On the high end, Palo Alto's R&D rents averaged $1.81 per square foot; Campbell and Los Gatos averaged $1.20; and Mountain View was $1.07. Newark's asking rents were the area's lowest, averaging 73 cents a foot.

Venture capital activity is a key driver in the commercial real estate market. VC's invested more than $2 billion in Silicon Valley companies in the third quarter, according to data released Monday by VentureOne, a San Francisco venture research group, and Ernst & Young.

The combination of local investment, tenant demand and the lack of new construction means ``we're going to have a really good year'' in terms of available space being absorbed, Doyle said.

Brokers are expecting more than a dozen leases larger than 100,000 square feet to be signed in the coming months, but so far, progress is still at a measured pace.

``Smaller fledgling companies have been forced by VCs and their own mantra to do more with less,'' said Bob Steinbock of CB Richard Ellis. ``So until they absolutely, positively need the space, they're not moving up.''

That was the case for InnoPath, Sym-Smith said.

``Being a VC-funded company, we started off with a concept and several people, and you grow as you secure your customers,'' he said.

InnoPath's customers include wireless carriers including Cingular, Sprint and T-Mobile, as well as handset makers LG, NEC and Toshiba. The company also added employees recently when it acquired Openwave's mobile device management unit, Sym-Smith said.

``Given the fact that we were growing at such a fast pace, it wasn't a tough decision'' to expand.

``This building had a lot of attractions,'' Sym-Smith said. Besides being a stand-alone building with enough room for growth, ``it was the former Broadcom headquarters, so it was basically move-in ready. It has excellent wiring and facilities and really addressed our needs.''


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Contact Jon Ann Steinmetz at jsteinmetz@mercurynews.com or (408) 271-3667.





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