Google propels commercial real estate sales in Silicon Valley

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Google’s growth has helped bump up commercial leasing activity in the second quarter.

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Nathan Donato-Weinstein
Real Estate Reporter- Silicon Valley Business Journal


Google Inc.’s ravenous appetite for office space continued to fuel the region’s commercial real estate sales in the second quarter, contributing to a total of $940.3 million of office properties changing hands. That’s up 14 percent from a year ago, according to the latest numbers from New York research firm Real Capital Analytics.

A slew of pricey deals pushed the price per square foot to a record $394, RCA said, while cap rates — a measure of yield that typically goes down as prices go up — compressed to about 5.7 percent.

“That means there’s more competition for these transactions,” said Ben Thypin, director of market analysis for Real Capital Analytics. “Whether you’re looking at cap rates or price per square foot, the San Jose metro area is pretty hot.”

The San Jose area’s strong sales activity comes as the broader national market also experiences a recovery. U.S. office transaction volume was $23.73 billion in Q2, up about 25 percent year over year and the eighth straight quarter of year-over-year increases.

But San Jose’s numbers were enough to propel the metro area to the No. 7 slot on Real Capital Analytics’ Top 40 U.S. office markets, slotting in between Chicago and Dallas. San Francisco hit No. 3, with $4.2 billion in deals. Manhattan and Los Angeles came in at Nos. 1 and 2, respectively.

San Jose’s showing on the list is its highest performance in years, Thypin said.

“The fact that over the past 12 months through Q2 there’s been $3.6 billion in transactions is the most in a 12-month period since the end of 2007,” he said.

And quarterly sales volume is the most since the third quarter of 2007, except for a massive jump in Q4 of 2013.

Notable transactions in the second quarter included Sand Hill Property Co.’s $140 million purchase of the Cooley LLP building in Palo Alto’s Stanford Research Park, Prudential Real Estate Investor’s acquisition of Mission Towers in Santa Clara and Rockwood Capital’s pickup of Mountain View Corporate Center.

But much of the activity can be attributed to one user: Google. During the quarter, Google’s most jaw-dropping pickup was the $250 million price it paid for the 400,000-square-foot Synopsys campus, a price per square foot of $625.

Real Capital Analytics shows Google’s local office acquisitions totaling $581.7 million in the past two years. And Google has spent $271.5 million in the past two years locally on industrial properties. Just last month, Google bought at least 10 properties in Mountain View, including an eight-building portfolio from Boston Properties last week.

The Google deals now make the search giant a significant landlord in its own right because many of its properties are leased long-term to other tenants. Google has declined to say much about its intentions, but the company is clearly planning for long-term growth.

One area of weakness during the quarter: Downtown San Jose deals. Just $40 million in deal volume was recorded in the region’s central business district, a decline of 80 percent year over year.

That is probably because most institutional-quality office buildings in San Jose’s compact office base have already traded in the past year or two, including 225 West Santa Clara St., 60 South Market St., 50 West San Fernando St., and even Class B properties such as 111 W. St. John and 11 N. Market streets.

That could change in future quarters: Most observers believe Equity Office will seek to sell 10 Almaden, considered one of the best high-rise office properties in the city.

“There’s not that much central business district product in San Jose that’s institutional quality,” Thypin said. “The action in the market is in the suburbs.”

The quarter’s average price per square foot of $394 is perhaps more telling than sales volume, as more buyers chase the same assets. During the last upturn, in 2006-2008, prices per square foot peaked at $334 in Q3 of 2008 before slumping down to the low-$200s during the financial crisis.

(Edited by: Baumann, Lynch)

Nathan Donato-Weinstein covers commercial real estate and transportation for the Silicon Valley Business Journal.

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