interactive.wsj.com
April 4, 2001
Silicon Valley Vacancies Soar
As Firms Back Out of Deals
By SHEILA MUTO
Staff Reporter of THE WALL STREET JOURNAL
Silicon Valley is starting to feel more like a ghost town than a booming tech
mecca.
The area's technology companies, hurt by slumping revenue and worried
about the economy, have gone on a crash real-estate diet, curtailing
construction plans, backing out of deals to lease space and sometimes
throwing empty space back onto the market as they head out the door.
"The market has just stopped," says S. Gregory Davies, chief executive of
the commercial brokerage firm CPS Commercial Property Services Co.
Worse, it seems to be going backward.
The amount of occupied real estate in Silicon Valley dropped by 3.5
million square feet during the first three months of this year, according to
new data from CPS, of Santa Clara, Calif. The last time the so-called net
absorption rate fell anywhere near that amount was during the recession in
the 1991 first quarter, when it dropped nearly 1.8 million square feet, CPS
says.
Mr. Davies notes that only 1.5 million square feet of high-tech space were
leased or sold in Silicon Valley during this year's first quarter, down from
12.3 million square feet a year earlier and an average of four million square
feet a quarter over the past five years. "Demand for high-tech space is as
low as I can ever remember it being," he says.
That is certainly the case at Palm Inc. The maker of hand-held computing
devices said last week that it was postponing construction of a corporate
headquarters in San Jose that was originally set to begin last month and
was trimming its real-estate expenditures.
Meantime, in the wake of plans to
lay off as many as 8,000 workers,
Cisco Systems Inc. has abandoned
its search for sites in Sonoma
County, north of San Francisco, and
the Washington, D.C., area, and is
re-evaluating its real-estate plans at a
number of other sites. Some people
in the real-estate industry speculate
that Cisco will sublease a big chunk
of the space that it has, particularly in
Milpitas, a city just north of the
company's San Jose headquarters.
Several other companies have
recently backed out of big lease
deals, according to a Silicon Valley broker. To make matters worse, a few
weeks from now, Yahoo! Inc. will begin relocating employees from about
310,000 square feet of leased space in buildings throughout the Silicon
Valley. They will move to the company's new 797,000-square-foot
corporate headquarters in Sunnyvale, where the company plans to
sublease one of the four buildings on the site, says a Yahoo spokeswoman.
Mr. Davies of CPS says that of the nearly 13 million square feet of
high-tech space available in Silicon Valley, about one-third is available for
sublease, more than double the amount at the end of last year. The Valley,
which stretches from Menlo Park in the north to San Jose in the south and
Fremont to the east, is home to about 195 million square feet of office and
research and development space.
The overall vacancy rate in the area has jumped to nearly 8% from nearly
5% at the end of last year, while the average monthly rent during the period
has dropped to nearly $4.50 a square foot from about $5.60, according to
CPS.
People in the real-estate industry hope the slump won't last. "I'm optimistic
the market will come back soon," says Jim Beeger, vice president of the
Santa Clara-based brokerage firm Cornish & Carey Commercial. He adds
that he is planning to renew his broker's license this year. But he doesn't
believe that leasing activity will resume until early next year. Even if
technology and the economy turn around by the fall, "most companies have
enough internal capacity that they can take care of their expansion in
house," he says. "When people built their complexes, they built them with
expansion in mind."
Indeed, Ariba Inc. had planned to grow into its new 715,000-square-foot
corporate headquarters, which is now being built in Sunnyvale. Because of
that, the business-to-business software company put about 270,000
square feet up for sublease. But earlier this week, the Mountain
View-based company announced it was laying off 700 workers and
re-examining the need for the headquarters.
Joe Moriarty, a real-estate broker at San Jose-based BT Commercial
Real Estate, points out that rents are still two to three times what they were
in 1998 and 1999, and while the overall vacancy rate is up, "it's still a
single-digit, healthy market."
A handful of companies are also bucking the trend -- at least for now.
Veritas Software Corp. plans to move into its new 425,000-square-foot
headquarters in Mountain View this summer. It has also leased a
one-million-square-foot campus in Milpitas that is under construction. And
Juniper Networks Inc. purchased 80 acres in Sunnyvale from Lockheed
Martin Corp. to expand its campus in a few years.
Nonetheless, "it's not easy to come up with many names" of companies
taking more space, says CPS's Mr. Davies. "The companies that are
making deals today are the ones [that have] lease expirations coming up or
need smaller quarters. They are not motivated by growth."
Lynn Sedway, executive managing director of Sedway Group, a consulting
unit of real-estate services firm CB Richard Ellis Services Inc., says that
during the past two weeks her company has been approached by several
corporations that are "taking a closer look" at their real-estate portfolios.
While companies are continually re-evaluating their real-estate holdings to
cut costs, this level of activity is "a lot," she says.
Write to Sheila Muto at sheila.muto@wsj.com |
