Silicon Valley’s Commercial Real Estate Desperate for Market Rebound

If the economy has hit bottom and a recovery is taking shape, you’d be hard pressed to find signs of it in the market for commercial real estate in Silicon Valley.

As reported by Pete Carey of the San Jose Mercury News:

The credit crunch was followed by rising unemployment, which hit 11.8 percent in the valley in July, with 108,900 people actively looking for work. “Ultimately, commercial real estate is related to employment,” said Dick Scott of Grubb & Ellis. “It’s all about putting bodies in cubes and selling products.”

The valley’s 20.5 percent office vacancy rate is the highest since 2003, according to CB Richard Ellis, and has hit 53.4 percent in Sunnyvale. An 18.9 percent vacancy rate for research and development space — the largest commercial real estate category in the valley — is the highest since early 2006.

At the moment, there are 29.1 million square feet of vacant research and development space and 12.6 million square feet of empty office space in the valley; that includes 277 completely vacant R&D buildings and 39 completely vacant office buildings, according to CB Richard Ellis, which has an office in San Jose.

Depressed global markets have accounted for a lot of the damage, but so have consolidation and M&A activity. In the big picture, however, one could argue that much of the M&A action was facilitated by the worldwide economic downturn, which presented the industry titans with glorious opportunities to pick off rivals or complementary players for bargain-basement prices.

Oracle’s pending acquisition of Sun Microsystems, for example, is likely to add more commercial space to the market. The consolidation wave is still flowing, too. Additional office space will reach market as smaller players are subsumed into the existing commercial real estate of their new corporate paymasters.

It doesn’t help that new office buildings, construction of which commenced before the downturn unleashed its worst carnage, are heading to market. Their appearance will further exacerbate oversupply.

Looking at the situation from the other side of the table, I would imagine that venture capitalists and their startup companies that remain extant aren’t shedding many tears for commercial realtors and real-estate developers. Those seeking office space are well placed to capitalize on the depressed conditions.

Nonetheless, the commercial realtors — some of them, anyway — retain hope. The optimists in their midst think the recovery will comfortably absorb the current oversupply of space, restoring balance to a reeling market.

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