anyone need to lease some space to store your bullion? -g-
Nortel, Cisco and Sun Micro Pay Millions for Empty Office Space
2002-07-15 03:08 (New York)
Nortel, Cisco and Sun Micro Pay Millions for Empty Office Space
San Jose, California, July 15 (Bloomberg) -- Nortel Networks
Corp., Cisco Systems Inc. and Sun Microsystems Inc. are competing
in an unlikely business for the technology giants: office space.
The three lead the ranks of companies trying to sublease
unwanted offices in California's Silicon Valley, offering a total
of about 2 million square feet. Excess buildings are costing each
company more than $20 million a year in rent, brokers estimated.
Prospects for finding new tenants are poor, brokers said,
showing the drop in demand for Internet and technology-related
services has saddled companies in the technology hub with extra
costs on top of falling revenue.
``The demand side is pretty flat, if not nonexistent,'' said
Hernan Santos, a senior director at broker Cushman & Wakefield's
Silicon Valley office. ``My prediction is we've got enough space
to last us at least five years.''
The area's vacancy rate has risen to 32 percent from 3.5
percent in the late 1990s. Cisco has offered potential tenants
incentives including a discount on a telephone system based on
Internet technology. Its brokers raffled a free trip to Cabo San
Lucas, Mexico, at a recent open house to stir interest in one of
its buildings.
``They were trying to send a message, 'We are motivated to
make deals happen,''' said Frank Friedrich, a broker with CB
Richard Ellis who attended the open house.
Converting Warehouses
In the late 1990s, Silicon Valley developers couldn't build
fast enough to keep up with demand. Startup companies flush with
venture capital gobbled up everything from converted warehouses in
San Francisco to concrete-and-glass cubes in Santa Clara.
Companies rented whatever they could find, even if they
didn't need it, in anticipation that they would continue to grow.
Average rents in Mountain View and Palo Alto topped $100 a square
foot, exceeding the midtown New York, which peaked at $68.70,
according to Colliers ABR.
Now, the Nasdaq Composite Index, where shares of Sun and
Cisco trade, is down 71 percent from its high in March 2000. Cisco
has cut 5,400 jobs and Sun shed 3,400. The unemployment rate in
San Jose, Cisco's hometown, was 7.1 percent in May, up from 3.4
percent a year earlier.
``Even if employment growth picks up, I find it hard to
believe companies will be taking more office space before late '03
or early '04,'' Steve Sakwa, an analyst with Merrill Lynch & Co.
told clients in a conference call last week. On a tour of northern
California, ``we saw a fair amount of sublease signs on just about
every building we passed,'' Sakwa said.
Slashing Rents
Most companies, if they are lucky enough to find replacement
tenants, will recover only about 40 percent of their rents, said
Mike Michaels, principal at broker Cresa Partners.
Nortel, based in Brampton, Ontario, is North America's second-
biggest maker of telephone gear. The company took a charge last
year of $757 million for excess space and equipment. The amount
would be higher except that Nortel expects to recover about $506
million through subleasing, according to the Securities and
Exchange Commission filings.
Santa Clara, California-based Sun took a $365 million charge
late last year to write down construction costs and leases at
properties it doesn't need. Cisco increased its excess space
liabilities by $93 million, to $341 million.
``Since the real estate market has deteriorated in Silicon
Valley, we felt it was appropriate to accrue an additional charge
to reflect the lower market values,'' Cisco spokesman Steve
Langdon said.
`Plug and Play'
Nortel is trying to sublease about 800,000 square feet,
spokesman David Chamberlin said. Shares of Nortel are down 80
percent this year.
Half of Nortel's available space is less than two years old,
most of it ``ready to plug and play,'' Chamberlin said.
Cisco, the largest maker of networking equipment, has 690,000
square feet up for sublease, Langdon said. That includes 195,000
of the 1 million square feet Cisco leased two years ago at $30 a
foot at McCarthy Center, a corporate campus in Milpitas developed
by the Irvine Co.
Sun, whose servers run corporate networks and Web sites, has
660,000 square feet up for sublease, said spokeswoman Diane
Carlini.
Asking rents were $48 a square foot in some of Sun's
buildings when it signed leases in 2000, according to property
researcher CoStar Group Inc., more than double recent asking rates
for the same space. Sun offers its workers individual offices,
making the space less marketable than open floor plans, brokers
said.
``Most companies don't like private offices,'' said Gregory
Davies, chief executive of CPS Commercial Property Services Inc.
``Usually, they have to tear out the interiors.''
The size of Nortel's, Sun's and Cisco's spaces, which often
are at least 50,000 square feet -- large enough to accommodate 250
workers -- also is working against them.
``When you get to 50,000 and larger, it's a much slower paced
market,'' Friedrich said. ``I don't hear of any companies going
through growth spurts now.''
--Elizabeth Hayes in the Los Angeles newsroom (323) 801-1265, or
at ehayes2@bloomberg.net. Editors: Kleege, *Burgess, *Browne.
Story illustration: For a graph of the San Jose vacancy rate,
enter {CBOV5SJ <Index> GP <GO>}
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