Silicon Valley Research and Forecast Report

by CoyDavidson on May 3, 2012

My primary focus is the Houston office market since I am based in the Energy Capital of the world. However, I have also done a considerable amount of work in the Austin office market with plans to do more, so I obviously follow these markets very diligently. Outside of Texas, I follow the Silicon Valley commercial real estate market with a keen eye as there is some synergy with Austin and I have had the opportunity to collaborate with my colleagues on projects in Texas with Silicon Valley based companies. I always look forward to getting the quarterly reports from my friends in Northern California. Senior Managing Partner, Jeff Fredericks and his team are an awesome group of professionals.

OVER THE HUMP

Gathering Steam for the Trek through the Recovery

From a macro economic standpoint, the first quarter of 2012 sounds much like the first quarter of 2011: unemployment and labor force statistics from ADP and Bureau of Labor Statistics (BLS) show promise; the Institute of Supply Management (ISM) data shows an expanding manufacturing sector; and consumer confidence is increasing. Yet, at the same time, economic uncertainty from various external elements still lurks on the sidelines. As the country waits for a clear and unfettered start to the recovery, the reality is that economists will be looking backward, not forward, to identify that date (not unlike pinpointing the start of a recession). In other words, the recovery will only become clear looking in the mirror after successfully navigating economic uncertainties and shocks that threaten the economy. For the Silicon Valley commercial real estate sector that means starting the year where it left off; trudging forward amidst national and global uncertainty after successfully navigating the shocks of the prior year.

After the strongest year of leasing and user-sale activity in the Silicon Valley in recent memory, first quarter activity remained consistent, with gross absorption measuring 5.99 million square feet, up from 5.77 million square feet in Q4 2011. It’s worth noting that the 5.77 million square feet of demand reported in Q4 2011 was the lowest quarterly demand for 2011, so the 3.83% increase shows that Silicon Valley commercial real estate demand is both back and leveling off. Three more quarters of six million square feet of demand will put the Silicon Valley right on Colliers’ forecast for 2012.

Net absorption was a negative 293,292 square feet in the first quarter. The occupancy loss was a direct result of the continued fallout from Solyndra. As the consequences of Solyndra’s bankruptcy proceedings became clearer, Colliers officially recorded the “vacancy” of more than one million square feet of pre-improved space formerly occupied by Solyndra. Had it not been for this 1,103,108 square foot vacancy loss attributable to Solyndra, the Silicon Valley would have posted 809,816 square feet of positive net absorption for the quarter, which would have been the fourth straight quarter of positive net absorption for the Silicon Valley.

The Solyndra adjustment shows the rocky nature of the recovery and displays the various economic starts and stops that make it difficult to identify the beginning of the recovery. Ironically, it was just a mere three years ago that the clean tech industry was hailed as the white knight that would pull the economy out of the recession. Today, this industry has become a drag on the economy and has contributed to the Silicon Valley’s occupancy loss in the first quarter. The available space rate continued to decline, decreasing from 14.0% at the end of the year to 13.6% in Q1 2012. The trend is clear as the overall availability rate has dropped continuously each quarter since peaking at 18.6% in Q3 of 2010.

Job growth in the Silicon Valley and the greater Bay Area remains strong. During the last year job totals grew by 1.9%, which is more than double the pace of statewide job growth. Moreover, the U.S. Department of Labor’s most recent unemployment rate for the Silicon Valley weighed in at an estimated 9.1%, down 140 basis points from a year ago. Lead by the technology sector, the Silicon Valley is still the envy of California, if not the Country.

Colliers International Q1 2012 Silicon Valley Report

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