Research & Forecast Report SAN JOSE | SILICON VALLEY Q3 2019 Silicon Valley Commercial Property Market Sees Gains for All Product Types > Confidence in Silicon Valley commercial property remained strong in Q3 2019 with gross absorption reaching 4.9 million square feet for Market Indicators - Santa Clara County all tracked commercial product. Santa Clara County Population Growth Santa Clara County > For the second consecutive quarter, net absorption surpassed 1.0 Median Household Income Unemployment Rate million square feet across all product types, making Silicon Valley one of the strongest markets in the United States. 4.7% 2.6% > Across all product types, the vacancy space rate fell to 4.4 percent, down 100 basis points from Q3 2018. $107,000 CA Unemployment Rate Silicon Valley’s economy continues to fire on all cylinders. According 2013-18 to California’s Employment Development Department (EDD), the 3.5% unemployment rate in Santa Clara County rose slightly quarter over quarter to 2.6 percent, however, remains below the national average of Source: EMSI & EDD 3.5 percent. EDD reports that Santa Clara County added 28,800 jobs between August 2018 and August 2019, led by the information sector. Given that job growth is a proxy for commercial real estate demand, the growing economy is boosting confidence in Silicon Valley’s commercial real estate market. And despite an influx of new construction entering the Market Trends market, demand is still very much overshadowing supply, evidenced by Relative to prior quarter Q3 2019 Q4 2019* rising rents and record-low vacancy rates. Vacancy In September, California lawmakers approved a statewide rent cap on Net Absorption multifamily properties which would limit annual rent increases to 5.0 percent plus the local inflation rate. Assembly Bill 1482, spurred on by the Office Rental Rate housing affordability crisis, will impact multifamily properties constructed prior to 2005, which represent the majority of Santa Clara County R&D Rental Rate housing stock. The worth of these properties is directly tied to the income Industrial/Warehouse Rental Rate they produce and a state-enforced rental cap may inhibit that worth. The law may potentially see investors chasing greater returns redirect their *Projected capital to other commercial assets. While rent control is one method to alleviate the housing crisis, an alternative position is to alleviate regulations and fees for new developments. Incentivizing developers to build more housing, especially around transit, could help stabilize housing costs and ease traffic woes. Summary Statistics Previous Current Silicon Valley All Products Quarter Quarter Vacancy vs. Availability Rates Overall Vacancy Rate 4.7% 4.4% Silicon Valley | All Products Net Absorption 1,123,672 1,241,028 10% Office Asking Rents* $4.97 FS $5.04 FS 9% 8.2% R&D Asking Rents* $2.26 NNN $2.27 NNN 8% Industrial Asking Rents* 7% $1.26 NNN $1.57 NNN 6% Warehouse Asking Rents* $1.07 NNN $1.08 NNN 5% *Asking Rents Reported Monthly 4% 4.4% 3% 2% 1% 0% 3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 AvailabilityAvailability Rate Rate VacancyVacancy Rate Rate 80 580 880 680 SAN Office Silicon Valley Office FRANCISCO Rent vs. Vacancy BAY FREMONT > Office gross absorption recorded nearly 2.2 million square feet in Q3 2019, down 8.0 percent from Q3 2018. 25% $6.00 $5.04 > Net absorption was a positive 837,757 square feet, fueled by preleased $5.00 20% new construction projects coming online. MILPITAS $4.00 101 > Weighted asking rents for office product reached $5.04 full service, up 15% $0.61 from Q3 2018. $3 .00 10% PALO $2.00 Confidence in Silicon Valley’s office market remains sound. Expansion 5.4% ALTO by mature technology companies combined with sustained venture capital 5% 280 $1.00 MTN. 237 flowing into the thriving private sector contributed to a strong quarter. VIEW Nearly 2.2 million square feet of gross absorption was recorded and the 0% $0.00 Valley’s office market saw net gains of 837,757 square feet, driven primarily Q3-10 Q3-11 Q3-12 Q3-13 Q3-14 Q3-15 Q3-16 Q3-17 Q3-18 Q3-19 by new construction. Total Vacancy Rate Asking Rent (FS) SUNNYVALE The quarter saw three office properties complete construction: Jay Paul’s Source: Colliers International Research LOS ALTOS SANTA CLARA 350,664-square-foot building at 1190 Discovery Way in Mountain View, preleased to Facebook, Sobrato’s 204,000-square-foot building at 353 W Office Availability Rates 85 Julian Street in San Jose, a build-to-suit for the County of Santa Clara, and Select Silicon Valley Cities 880 SAN JOSE CUPERTINO/ lastly, South Bay Development’s 187,660-square-foot Phase II of 237 @ First 87 SARATOGA located at 4453 N 1st Street in North San Jose, which is partially preleased Morgan Hill 5.5% to Rambus. In all, the quarter saw 742,324 square feet added to Silicon Valley’s office supply, 87.3 percent of which was immediately absorbed. Mountain View 5.6% Verizon signed the top two leases this quarter for a total of 1.2 million CAMPBELL/ LOS GATOS 101 square feet. The company announced plans to build a new technology Palo Alto 13.0% hub totaling 595,000 square feet at Hunter Storm’s Coleman Highline development in the Airport submarket. According to Verizon, the decision San Jose to locate to Coleman Highline reinforces its commitment to Silicon Valley in 11.9% order to retain and attract the best talent. The transit-oriented development, which is set to complete in 2021, is already 93.3 percent preleased. In Santa Clara 17.9% Sunnyvale, Verizon executed a partial sale-leaseback with Google for $1.0 billion at Yahoo!’s 594,412-square-foot former headquarters in Sunnyvale. Sunnyvale 2.1% MORGAN HILL/ Astonishingly enough, Google’s acquisition is not the search giant’s first GILROY billion dollar transaction – last year Google spent $1.0 billion on Britannia Shoreline Technology Park in Mountain View. West Valley 6.3% The quarter saw South Bay Development’s office project at 675 Creekside Source: Colliers International Research Way in Campbell lease to 8x8. Built in 2017, the project stood vacant for nearly two years. Following the long-awaited lease, South Bay put the Silicon Valley Office Q3-2019 177,815-square-foot office for sale for an estimated $145.8 million. At the Net Absorption vs. Gross Absorption GROSS: 2.1m end of the third quarter, the vacancy rate for the West Valley submarket NET: 838k stood at 2.4 percent, down 240 basis points year over year. 6.0 User-sale activity was firm in the third quarter. As mentioned earlier, 5.0 Google took a $1.0 billion bite out of Sunnyvale with the purchase of Yahoo’s 4.0 Millions (SF) Millions 974,639-square-foot former headquarters in a partial sale-leaseback deal 3.0 with Verizon. And in Cupertino, Apple purchased the 306,988-square-foot Cupertino City Center from American Realty Advisors for $290 million. With 2.0 vacancy levels at 0.5 percent in Sunnyvale and 1.3 percent in Cupertino, it 1.0 is not uncommon for large users to buy or develop campuses to meet their 0.0 growing space requirements. -1.0 The outlook for Silicon Valley office remains positive. Weighted asking rents Q3-10 Q3-11 Q3-12 Q3-13 Q3-14 Q3-15 Q3-16 Q3-17 Q3-18 Q3-19 climbed to $5.04 full service, up $0.61 from Q3 2018 and vacancy rate stands at 5.4 percent, down 120 basis point year over year. Gross Absorption (Qtr) Net Absorption (Qtr) Source: Colliers International Research 2 Silicon Valley Research & Forecast Report | Third Quarter 2019 | Colliers International 80 580 880 680 SAN Significant Transactions FRANCISCO BAY FREMONT Office Lease Activity Verizon Wireless 700-781 1st Avenue, Sunnyvale MILPITAS 101 Sale-Leaseback 594,412 SF PALO ALTO 280 Edelman Financial Services MTN. 237 VIEW 3315 Scott Boulevard, Santa Clara Sublease 41,252 SF SUNNYVALE LOS ALTOS SANTA CLARA Verizon Wireless 85 1193-1199 Coleman Avenue, San Jose 880 SAN JOSE CUPERTINO/ 87 Prelease SARATOGA 595,000 SF CAMPBELL/ LOS GATOS 101 Deloitte 225 W Santa Clara Street, San Jose Renewal 98,562 SF 8x8 MORGAN HILL/ 675 Creekside Way, Campbell GILROY Direct Lease 177,394 SF = Colliers International Deal Significant Transactions - Office Sale Activity PROPERTY ADDRESS SIZE SELLER BUYER 700-781 1st Avenue, Sunnyvale 974,639 SF Verizon/Yahoo Google 20300-20330 Stevens Creek Boulevard, Cupertino 306,988 SF American Realty Advisors Apple 1800-1850 Embarcadero Road, Palo Alto 259,586 SF KBS Realty Advisors Longfellow Real Estate Partners 3420 Hillview Avenue, Palo Alto 177,250 SF EPRI PSAI Properties II, LLC 620 National Avenue, Mountain View 151,998 SF National Avenue Partners Preylock Holdings Silicon Valley Research & Forecast Report | Third Quarter 2019 | Colliers International 3 80 580 880 680 SAN R&D Silicon Valley R&D FRANCISCO Rent vs. Vacancy BAY FREMONT > Gross absorption measured more than 1.6 million square feet in Q3 20% $2.50 2019, down 38.4 percent from Q3 2018. $2.27 > Net absorption was positive 273,652 square feet for the quarter. 16% $2.00 > Weighted asking rents averaged $2.27 NNN, unchanged from Q3 2018. MILPITAS 101 12% $1.50 The R&D sector was stable in the third quarter with leasing activity reaching more than 1.6 million square feet, however down 38.4 percent 8% $1.00 5.8% PALO from Q3 2018. ALTO 4% $0.50 280 MTN. For the second consecutive quarter, net absorption was positive 237 VIEW with gains of 273,652 square feet.