Commercial property acquisitions up in Silicon Valley

Commercial property acquisitions up in Silicon Valley

Silicon Valley/San Jose Business Journal - 9:04 AM PST Thursday

by Sharon Simonson

Commercial real estate investors acquired more than $5.6 billion in Silicon Valley property in 2006, up from less than $5 billion invested in 2005.

That contrasted with an overall decline in the pace of investment Bay Area-wide, according to newly released year-end numbers from market researcher Real Capital Analytics.

Investors put up about $16.3 billion to buy apartments, offices, shopping centers and industrial buildings from Sonoma to Santa Clara County in 2006, Real Capital says. That was down from a total of $18.8 billion invested in 2005 in the same geography.

The level of interest fell off in every property category, with the steepest decline in dollars spent to buy apartments, off slightly more than $1 billion to $3.4 billion in 2006.

San Francisco saw a drop from an aggregate of $7.7 billion invested in 2005 to an aggregate $5.86 billion invested in 2006.

In Silicon Valley, in contrast, investor interest waned in apartment and office buildings in 2006 compared to 2005, while interest in shopping centers and office buildings grew. However, nearly all of the roughly $1 billion increase in office investment can be traced to a single transaction: the sale for $1.1 billion of the 5.3 million square-foot Peery/Arrillaga Silicon Valley portfolio to real estate advisor and money manager Rreef Funds LLC, a unit of Germany's Deutsche Bank.

Capitalization rates, or cap rates, a measure of first-year yield, also continued to fall by and large, though not across the board. In perhaps the most-startling example, investors were willing to accept a 4.9 percent return on San Jose apartments last year, down from 5.1 percent in 2005.

Falling cap rates have been a subject of much investor interest in recent years, as buyers continued to pay increasingly higher prices for the income properties produced, compressing cap rates to the low and lower single digits.