Apple Drives Silicon Valley’s Biggest Leasing Boom Since 2000

Apple Drives Silicon Valley’s Biggest Leasing Boom Since 2000
An Apple Inc. logo on the exterior of the Yerba Buena Center for the Arts Theater in San Francisco on March 7, 2012. Photographer: Tony Avelar/Bloomberg

Apple Inc. is leading the biggest leasing surge in California’s Silicon Valley since the dot-com boom, as the company scours the region for space before building a futuristic new headquarters.

Office occupancy in the region rose by 2.7 million square feet (251,000 square meters) last year, the most since 2000, and rents may advance 11 percent to an average $36 a square foot in 2012 as tenant demand swells, according to broker Cassidy Turley Inc. Commercial-property investment in the Valley has jumped six-fold from a record low in 2009, luring buyers from outside California and the U.S., Real Capital Analytics Inc. data show.

“The foundation has been laid,” Sam Hamilton, managing director of San Francisco-based DivcoWest Inc., said in a phone interview. The real estate investment firm paid more than $300 million since July for 10 Silicon Valley office buildings. “When a large tenant leases a large amount of space, you have the domino effect.”

Apple, which has vaulted past Exxon Mobil Corp. to become the world’s most valuable company, burst out of its longtime base in Cupertino in 2011 to lease more than 1 million square feet in neighboring Sunnyvale, helping to cut the city’s office vacancy rate by more than half. The maker of iPad tablets, iPhones and Mac computers may rent an additional 700,000 square feet this year, said Gregory Davies, a senior vice president at Cassidy Turley in San Jose, California.

Drawing Investors

Apple’s expansion has attracted investors including New York-based Tishman Speyer Properties LP, which bought office buildings in Sunnyvale, and Alecta Pensionsforsakring, a Swedish pension manager, which purchased in Cupertino, according to Real Capital.

Speculative development, property built without a signed tenant, is under way in Santa Clara, just east of Sunnyvale. Irvine Co. of Newport Beach, California; Boston-based Beacon Capital Partners Inc. in partnership with Palo Alto-based Menlo Equities LLC; and the Sobrato Organization in Cupertino are constructing almost 1.2 million square feet of offices, according to the companies.

“It’s incredible and harkens back to an earlier era,” said Davies, referring to the late 1990s Internet wave, when such companies as Cisco Systems Inc., EBay Inc. and Sun Microsystems Inc., now part of Oracle Corp., leased hundreds of thousands of square feet at a time.

Sunnyvale’s office vacancy rate declined to 16.3 percent in the fourth quarter and rents rose 18 percent from a year earlier to $45.60 a square foot, Cassidy Turley data show. In Santa Clara, rents increased 11 percent to $24 a square foot, while vacancy fell to 21.5 percent from 22.3 percent.

Apple’s Growing Workforce

The Valley’s office rents peaked at $77.88 in the fourth quarter of 2000, the brokerage said.

Cupertino, where Apple fills 60 percent of the office space, including 856,000 square feet at its Infinite Loop campus, had Silicon Valley’s lowest vacancy rate. In the fourth quarter, it dropped to 3.6 percent, from 6.9 percent at the end of 2010, and rents rose 3.8 percent to $39 a square foot, Cassidy Turley said.

Apple, propelled by global sales of more than 35 million iPhones in the fourth quarter and 55 million iPads since the tablet was introduced, needs space to house its growing workforce in the years before completion of a proposed new headquarters in Cupertino, which at 2.8 million square feet would be one of the world’s largest corporate buildings.

The circular structure would house 12,000 workers and sit amid 5.7 million square feet of landscaping on the site of former Hewlett-Packard Co. and Compaq Computer Corp. office campuses that Apple owns. The city is looking over the plans, which will be refined in an environmental-review process, said Rick Kitson, a Cupertino spokesman.

Jobs’s ‘Spaceship’

“It’s a little like a spaceship landed,” Steve Jobs, Apple’s late co-founder, told the Cupertino City Council in June as he unveiled the project’s conception in one of his last public appearances. He died Oct. 5 of cancer.

Renderings show the glass-faced behemoth reflecting trails and a meadow-like setting. The design is by Foster + Partners, the London-based firm run by the Pritzker Prize-winning architect Norman Foster, with engineers Arup Ltd., also of London, and Philadelphia-based landscape architect Olin.

A fitness center, research buildings and 1,000-seat auditorium are also proposed for the 175 acres (70 hectares), which were assembled with three smaller deals beginning in 2006.

The proposal has been “generally well-received” and Apple has been a good corporate citizen since it was established in Cupertino in 1976, according to Kitson said. Still, the scale is unprecedented and the city wants a “thorough” vetting, he said.

Google Deals

Steve Dowling, an Apple spokesman, declined to comment on the company’s real estate plans.

Apple was Silicon Valley’s top property buyer over the last two years, based on its $415 million purchase in November 2010 of the 1.5 million square feet of Hewlett-Packard offices, according to Real Capital. Google Inc. ranked second, with four deals worth $184 million. Tishman was third with $156 million, and Rockwood Capital Partners LLC of White Plains, New York, which bought buildings in Sunnyvale, was fourth with $122 million.

Office sales totaled $1.3 billion in each of the past two years, following a trough in 2009 of $200 million, the lowest tally in records going back a decade.

The average capitalization rate for Silicon Valley deals last year was 6.1 percent, compared with a 7.3 percent U.S. average, showing high investor demand, the research firm said. A cap rate, a measure of investment yield, is a property’s net income divided by purchase price.

Next Moves

“It feels like we’re right in the middle of it,” said Hamilton of DivcoWest, whose clients include U.S. pensions and other institutional buyers. “Where to invest next in the Valley is our daily debate.”

Google, maker of the most popular search engine and the Android operating system, is seeking more space near its campus in Mountain View as the company expands its video and mobile-device offerings, said Phil Mahoney, a broker at Cornish & Carey Commercial Newmark Knight Frank in Santa Clara. He represented landlord Jay Paul Co. in Google’s lease for 715,000 square feet in Sunnyvale in August.

The company had its “biggest hiring year in history” in 2011, and will continue its property search this year “in the vicinity of our headquarters,” Jordan Newman, a Google spokesman, wrote in an e-mail.

‘Greatest Recovery’

Mountain View’s office vacancy rate fell to 6 percent in the fourth quarter from 9.6 percent a year earlier, according to Cassidy Turley. That was third-lowest in the Valley after 4.4 percent for Palo Alto, the former home of Facebook Inc., where it dropped from 6.3 percent. For Silicon Valley as a whole, the rate tumbled to 14 percent from a peak of 19.1 percent in the first quarter of 2010.

“This is the greatest recovery I’ve ever seen in the Bay Area,” said Michael Covarrubias, chief executive officer of San Francisco-based TMG Partners and a 35-year veteran of the industry. The developer is seeking approval from Mountain View officials to tear down an office park and build two towers with double the space, he said.

The tech rebound goes beyond familiar companies to hundreds of little-known firms that are creating services and applications for the Internet, said Stephen Levy, a Palo Alto-based economist. He said he expects 25,000 to 30,000 jobs to be added this year in Santa Clara County, the heart of the Valley, and that will further increase demand for space.

“The social-media guys, the guys doing apps, these markets are exploding,” said Levy, director of the Center for the Continuing Study of the California Economy. “They’re producing things that people want.”

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