Silicon Valley's office market still has a long road to recovery, but investors are proving themselves willing to go along for the ride with a pair of recently closed deals that point to rebounding demand across the tech-concentrated region.
The deals for two separate campuses in San Mateo and Santa Clara, California, underscore renewed interest among buyers despite lingering pandemic-induced challenges across the region's high-profile office market. What's more, those deals have proven to be especially attractive when they're valued for far less than their previous acquisition prices.
Silicon Valley real estate investment firm SC Properties, for example, paid $37.5 million to buy the San Mateo Gateway Center, a three-building campus that seller Kennedy Wilson acquired for $87.5 million half a decade ago. The deal totals roughly 222,200 square feet and includes the properties at 1800, 1810 and 1820 Gateway Drive.
Less than 30 miles south, San Francisco-based development firm TMG Partners landed a buyer for its Quad at Tasman campus in Santa Clara, a collection of seven buildings surrounded by corporate hubs for tech giants such as Meta, Google's Alphabet, Amazon, Nvidia and Microsoft.
South Bay Development scooped up the roughly 404,100-square-foot portfolio for $51 million, according to information filed with the Santa Clara County Recorder’s Office. That represents just a fraction of the $152 million the former owner paid in March 2020, not including the additional investments TMG made in capital improvements such as upgraded amenities and building improvements.
While occupancy rates have dropped at both campuses in the years since they were previously sold, their new owners point to stricter in-office mandates and renewed demand for physical space as evidence that Silicon Valley's market is on the brink of a sizable rebound.
"We believe in the office sector on the peninsula as a whole and already see 'return to office' momentum, which will help in filling any remaining vacancy," SC Properties Partner Kevin Phillips said in a statement on the company's purchase of the San Mateo Gateway Center, which is about 60% occupied. “The property is right in our backyard, and SC Properties has a long history of local, high-quality real estate management, so we are very excited to roll up our sleeves on this one."
Lower prices, bigger opportunities
Silicon Valley has long been one of the nation's most expensive office markets and home to the world's most valuable tech companies.
Given its role as one of the most concentrated tech hubs in the world, Silicon Valley's office market has been especially hard hit by the industry's widespread downsizing and weakened demand. Lingering impacts of the pandemic, coupled with many tech companies' efforts to downsize their real estate portfolios, has meant some buyers have stuck to the sidelines as they wait out any market uncertainties.
While leasing has rebounded slightly after hitting a post-pandemic trough last year, the regional availability rate is stuck at about 25%, according to CoStar data, and rents have fallen from their pre-pandemic highs of more than $80 per square foot to the current average of roughly $68 a square foot.
Investment sales have slowed considerably over the past year and a half, according to the data, with buyers collectively funneling less than $1.5 billion into the greater Silicon Valley area over the past year. That's a far cry from the region's pre-pandemic annual average of nearly $3 billion.
Yet, there have been recent signs that activity will gain some speed through the remainder of the year.
Fellow tech giant Microsoft, for example, earlier this month closed a more than $330 million Silicon Valley deal to acquire a campus in the nearby Silicon Valley suburb of Mountain View, California, a sale many stakeholders saw as a sign of the tech giant's long-term commitment to physical space.
Elsewhere in Silicon Valley, New York-based investment firm TriCap has listed a trio of buildings leased to Apple in Sunnyvale, according to prior CoStar News reporting. Newmark has been hired to help market the portfolio, including buildings at 410, 420 and 430 N. Mary Ave., about 6 miles north of Apple's Cupertino headquarters.
For the record
Gary Boitano of Cushman & Wakefield and Clarke Funkhouser of JLL consulted SC Properties on the San Mateo Gateway Center acquisition and were retained to handle leasing at the campus. Kevin Phillips and Chris Giotinis led the acquisition team in-house for SC Properties.