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What Palo Alto Numbers Aren't Revealing

Silicon Valley Office

Given greater Palo Alto's very tight market conditions and limited vacancy, sometimes the data does not communicate the full story. CBRE SVP Joe Kelly helps us read between the lines.

Joe, here putting around at The Olympic Club with dad Phil (a Santa Rosa lawyer), has proof tenants are craving more office space near transit: five of the top 11 greater Palo Alto leases in Q3 are for new construction; one is a sublease in a previously unoccupied building (and over half are walkable to Caltrain). In general, asking rate data is limited due to lack of vacancies (Palo Alto's increased by 69.8% from the 2010 low of $4.15) and high level of renewals. As a result, the actual new leasing comps are fewer. Understanding the differences in a few data points is critical to understanding relative value for the various buildings in markets, he says.

Yelp's 42k SF lease at 2100 El Camino Real was a top Q3 deal (we broke the story in August). Of the significant construction projects under way, most are pre-leased. Without these types of projects getting built, more companies would be forced to grow outside the greater Palo Alto market. And as a real estate strategy to lease the most desirable space, companies will proactively lease more than they can occupy, sublease a smaller portion for a short-term, and proceed to grow into all of it a few years later, effectively land banking their own real estate (i.e. Box in Redwood City, Palantir and AOL in Palo Alto). In many cases, leasing a minimum square footage is a requisite of being the first deal in a new development.

As more coveted space gets eaten up (vacancy is 4.8%), tenants are being forced to look elsewhere for meaningful expansion space. Look at Machine Zone moving from downtown Palo Alto to the Stanford Research Park, Box, originally from Palo Alto to Los Altos, and now, to Redwood City, above. Another example: 23 & Me is expanding in Mountain View. Joe made it to the Giants game yesterday,  but will not be back today (CBRE's got an afternoon panel in San Jose). Among his recent deals: AmericanExpress for Windy Hill Property Ventures in downtown Palo Alto and Ayasdi and AcademixDirect subleases for E*TRADE in Menlo Park.