Article by Broderick Perkins
It's wasn't just 2001's economic shift away from stratospheric growth in the technology sector that sent commercial vacancy rates soaring and rental rates plummeting. Sept. 11 brought concerns about security and other matters that further plagued the industry.
However, optimists say tough times for building owners and property managers are creating golden opportunities for companies looking for prime space.
More than 24 million square feet of Silicon Valley office and research and development space had been left empty by the end of 2001, creating a 13.5 percent vacancy rate for direct and sublet space combined, according to Cushman & Wakefield's preliminary fourth-quarter statistics.
That was more than five times the 4.5 million square feet of vacant space at the end of 2000 when the vacancy rate was only 2.8 percent.
Leasing activity for the year was up to only 11.8 million square feet by Dec. 21, 2001, far less than the 34.2 million during the same period in 2000.
The year 2000 was incredible, says Kevin Koda, a Cushman & Wakefield research associate in San Jose. "Anything coming from that level looks like a letdown, but I hesitate to say when we'll recover. We still have a lot of large spaces available and a lot will be hitting the market soon."
Fallout from Sept. 11 also could prolong recovery as the commercial real estate industry adjusts to the need for heightened security, a rise in insurance premiums and tighter capital, says Stan Ross, Chairman of the Lusk Center for Real Estate at the University of Southern California.
"Businesses that choose to scatter their operations among multiple suburban settings will spend more on building security and less on amenities," Mr. Ross says. "Owners and property managers have to collaborate closely with tenants to assess risk exposure in new and existing buildings, and to decide who will absorb the costs of added security personnel."
The market is, however, ripe for those looking to acquire prime space. Combined sublease and direct office space was renting for $3.20 per square foot per month, full-service, in the fourth quarter of 2001, down from $4.93 a year earlier, according to Cushman & Wakefield.
Combined R&D space was an even better bargain at only $1.96 per square foot per month triple net in the fourth quarter 2001, down from $4.28 in 2000.
"People lead their discussions with price when their real focus is on the location," says Michael Mullinix, president of the Santa Clara County Association of Realtors. "The price is the icing on the cake, but the substance is the ingredients of the cake."
Redevelopment threatens history
Keith Watt, owner of the Houghton Donner Mansion, has proposed a $14 million plan to save the historic home of former San Jose Mayor Sherman Otis Houghton and his wife, Donner Party survivor Eliza Donner, from redevelopment's wrecking ball.
The large 120-year-old Victorian Italianate-style building at 156 E. St. John St. is in the path of the San Jose Redevelopment Agency's plan to build a parking garage for the new civic center just south of East Santa Clara Street between Fourth and Sixth streets.
Mr. Watt's plans calls for the Redevelopment Agency to move the mansion one block east to the corner of Fifth and St. John, near his Le Petit Trianon Theatre at 72 N. Fifth Street.
Brian Grayson, Mr. Watt's consultant, says if the city installs a permanent foundation for the project and provides financial assistance, Mr. Watt will maintain it as a 52-room boutique hotel. Mr. Watt says he would also construct an addition with an archival library of historical references about the Donner Party, the mansion and related history.
The plan also calls for Mr. Watt to purchase 60 parking spaces in the new city garage to serve the hotel, and 100 parking spaces for the theater.
Already an official city of San Jose historical landmark, the mansion is up for historic landmark status from both the California Register of Historical Resources and the National Register of Historic Places, Mr. Grayson says.
The San Jose City Council likely will review the proposal sometime this month, according to Mr. Grayson.
'Curse you, Red Baron'
After 26 years of serving up London broil and pasta to the roar of jet airliners, the 94th Aero Squadron restaurant closed two days before Christmas to help make way for an improved runway.
Designed like a French farm with a sandbagged battlefield theme on the west side of Mineta San Jose International Airport, the restaurant will become the site of a plant to produce concrete to reconstruct the airport's main runway.
The eatery opened in 1975 and still had two years on its lease when the city exercised an early-termination clause and ordered it out by mid-January this year.