Valley’s Commercial-Property “Bloodbath” Symptom of More Serious Malady

The sorry state of Silicon Valley’s commercial real estate is a symptom of a more serious malady.

Quoting commercial-property numbers from CB Richard Ellis Group Inc., Bloomberg reports that more than 43 million square feet (4 million square meters) of office space — the equivalent of 15 Empire State Buildings — stood vacant in Silicon Valley at the end of the third quarter, the most in almost five years. It is the biggest office-property glut to afflict the peninsula since the dot-com bust.

Bloomberg reports that about 21 percent of Silicon Valley’s Class A office space is vacant, as is 20 percent of low-rise “flex” (research and development) space, which can be used for offices or manufacturing, according to CB Richard Ellis.

Given the Valley’s persistently high unemployment rate — holding at about 12 percent — and the generally weak state of the broader economy, the situation is not expected to improve any time soon. With layoffs mounting at some of the Valley’s largest employers, a steady flow of jobs being transferred overseas, and a paucity of venture-backed startup companies to pick up the slack, the market dynamics don’t favor those who own and manage the area’s office buildings.

Foreclosures of commercial property are expected to double in 2010, and job growth isn’t anticipated to increase until 2012, according to some projections. Meanwhile, Valley companies that remain in business are unwilling to pay sticker-price rents, using the abundant supply of space as negotiating leverage for sharp discounts.

I suppose it’s good news for those seeking space. On the whole, though, the data suggests the Valley is in frail health. Unemployment is way up, commercial-property values are about to go way down, the traditional IT industry has tottered into slow-growth maturity and seemingly endless cost-cutting, the VC community has been decimated, and the social-networking upstarts depend (to a certain extent) on robust consumer spending that is unlikely to materialize in the near term.

The hope is that new industries can supersede information technology as the Valley’s growth engine. That could happen. Cleantech startups are drawing an increasing percentage of overall investment dollars, and the long-term prospects for that sector are bolstered by geopolitical as well as economic imperatives.

But it will take time. As the title of this blog proclaims (and has done for some time), we are witnessing twilight in the valley of the nerds.

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