Savills Studley Report Silicon Valley office sector Q4 2018

Savills Studley Research Silicon Valley

SUMMARYMarket HighlightsLEASING COOLS

Deal volume fell below 2.0 million square feet (msf) for the first time in several quarters, totaling 1.9 msf. Tenants have leased 8.2 msf in the four most recent quarters.

AVAILABILITY INCREASES

The Valley’s overall availability rate rose by 20 basis points, increasing to 14.4%. The availability rate in Class A buildings jumped to 17.8%.

LITTLE CHANGE IN RENT

Overall asking rent spiked by 3.7% to $51.40 ($4.28) in the fourth quarter. Class A rent rose by 5.2% to $54.39 ($4.53) during the quarter.

SALES DROP

Office property sales during the first eleven months of 2018 totaled $4.1 billion, a 12.2% decrease compared to the same period during 2017.

“Silicon Valley ended 2018 with another round

of aggressive big-block takedowns. As the

availability of larger blocks of space dwindles

further, companies are pushing into areas

such as North San Jose and Downtown San

Jose. As a result of space shortages, even

mid-sized companies are facing rental rate

growth. Additionally in Menlo Park, Palo Alto

and Sunnyvale/Cupertino, startups are being

squeezed out of the market.”

Nate Currie,

Corporate Managing Director

02

Savills Studley Report | Silicon Valley

Sublease Space on the Rise, Competition for New Space Remains Brisk

Leasing is not slowing down in Silicon Valley. Momentum remains strong. Top tech companies continue to make aggressive moves for space – both through leases and purchases – across the South Bay. During the final months of the year, several additional 100,000-sf-plus transactions were completed. As of mid-December, 22 leases over 100,000 sf had been signed during 2018.

The surge in blockbuster leases parallels a burst of massive venture capital fundings in the past year. According to the latest Moneytree Report from PwC and CB Insights, U.S. companies hit a record for $100M+ funding rounds with 184. The number of rounds fell for the second straight year, dropping to 5,536, but the total funds raised surged to $99.5 billion, the most since 2000. Silicon Valley tallied $5.27 billion during the fourth quarter of 2018, second only to $6.75 billion in San Francisco.

SoftBank remains a market leader in funding. It has led financings of $100 million or more for 16 U.S. firms in 2018. Late in the year, though, the Japanese private equity firm finally showed some limits. Backers of Softbank backed away from a proposed $16-billion investment in WeWork Companies. Still, SoftBank's Vision Fund has already committed nearly $8.0 billion to WeWork. Other SoftBank investments include $385 million in subscription car service Fair. The company buys used cars from dealers and then offers cars to drivers for a subscription fee. Fair has a partnership with Uber. Softbank is Uber Technologies largest investor; they paid $8.0 billion for a 15% stake earlier this year.

Tech Giants And Venture Capital Keep The Momentum Rolling

Silicon Valley tech giants kept leasing activity well above historical norms during 2018. This continued a stretch of fierce competition for new product that started more than two years ago. Google has been the tenant of first resort for most of the last several years, leasing or acquiring several million square feet of current and proposed development. More recently, Facebook has set the tone. The social media giant commited to the entirety of WeWork's center in Mountain View, taking 450,000 sf at The

Source: Bureau of Labor Statistics^

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-12%

-8%

-4%

0%

4%

8%

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Millions

SVAL.Office Emp. SVAL. (% Annual Change) U.S. (% Annual Change)

Office-Using Employment Trends

$4.53

$3.30$4.07

$2.64

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

Q4'18Q4'17Q4'16Q4'15Q4'14Q4'13

($/sf) Rental Rate Trends

Class A Class B & C

Asking Rent Trends

17.8%

17.8%

12.4%10.9%

0%

5%

10%

15%

20%

Q4'18Q4'17Q4'16Q4'15Q4'14Q4'13

(%) Availability Rate Trends

Class A Class B & C

Vacant Availability Rate Trends

savills-studley.com/research 03

Q4 2018

Tenant Sq Feet Address Market AreaSplunk, Inc. 285,654 700 Santana Row South San JoseSingularity University 149,999 2831 Mission College Blvd Santa ClaraProofpoint Inc. 121,200 625 N Mary Ave Sunnyvale/CupertinoMicro Focus 112,605 4555 Great America Pky Santa ClaraPaladin Max, Inc 99,156 2479 E Bayshore Rd Palo AltoNutanix 80,489 25 Metro Dr North San JoseAmazon 75,378 20400 Stevens Creek Blvd Sunnyvale/CupertinoZoom VIdeo 62,000 55 Almaden Blvd Downtown San JoseEva Automation Inc. 34,464 1020 Marsh Rd Menlo Park (San Mateo South)Niantic, Inc 12,825 100 Mathilda Pl Sunnyvale/Cupertino

Sum of Leases 1,033,770

Village at San Antonio Center. Earlier this year, Facebook grabbed three buildings totaling just over 1.0 msf at Moffett Tower II. The buildings are scheduled to deliver in early 2019.

Facebook also pushed into areas that had previously been bypassed by most firms. It snared a 14-building, 750,000-sf complex in Fremont. The location, owned by Peery Arrillaga, is bounded by Kaiser Drive, Campus Drive and Dumbarton Circle. Finally, life science firms hoping to take space at Kylli's Burlingame Point development will have to look elsewhere. Facebook swooped in to take the 767,000-sf complex on the San Francisco Bay. The facility will house Facebook's Oculus division.

Bidding Wars

Facebook's activity has spurred a heightened sense of urgency among other expanding firms. In the second quarter, Micron Technology took an entire three-building campus in North San Jose totaling 541,000 sf at 110-130 Holger Way. Several significant leases were signed in the second half of the year. Splunk committed to 285,654 sf at 700 Santana Row. Scheduled to deliver in 2019 the 319,000-sf LEED Silver building will feature ground level retail and a 1,300 space parking garage. In Sunnyvale, cybersecurity and compliance company Proofpoint Inc signed a 121,200-sf lease at the Pathline Park complex. Proofpoint will join Snyopysys at the 50.4-acre campus located within Peery Park. Developer Irvine Company is demolishing 28 circa-1970s office and industrial buildings in the park, to make way for a five-phase development.

These larger leases, and the wave of earlier activity from Google and Facebook, caused midsize company displacements across the region, forcing more market relocations than would otherwise be expected. The market has been exposed to a bidding environment for years, as demand has pushed space requirements into other areas.

Silicon Valley is accustomed to high sublease occupancy and low vacancy durations but for the first time in years we are seeing a spike in quality sublease vacancies. Silicon Valley had a total of 4.0 msf of sublet space available at the end of 2018, up from 3.9 msf a year ago. Quality sublet spaces have also been lingering on the market for a longer period.

Coworking Proliferation Continues

Some of the sublet space may also go unfilled as more small and mid-sized firms opt for coworking space. Coworking providers continue to grow, giving smaller firms another option to consider. As demand for co-working space solutions increases, competition between coworking vendors and traditional space models is intensifying. Although coworking spaces provide flexibility with short term leases and full staff support in the market, the cost per square foot is breathtaking.

At a quick glance these coworking spaces provide additional inventory and flexibility of leases. For the time being at least, the appeal of these flexible space options is very high – particulary in a very tight and challenging market. Many landlords are also jumping into this space which is not a very high-barrier to entry market. From

a tenant perspective, it is important to understand the economics of leasing space in a coworking center. Based on a careful analysis, tenants can calculate whether it would be more cost effective for the company to lease its own space.

Availability Rate Comparison Rental Rate Comparison

Major Transactions

$85.83

$73.39

$72.84

$71.99

$51.55

$51.40

$48.17

$46.00

$44.18

$43.79

$34.69

$33.20

$29.51

$28.82

$0 $20 $40 $60 $80 $100

Menlo Park (San Mateo South)

Mountain View/Los Altos

Palo Alto

Sunnyvale/Cupertino

South San Jose

Silicon Valley

Campbell/Los Gatos

Downtown San Jose

North San Jose

Santa Clara

US Index

Fremont (880 Corridor)

Morgan Hill/Gilroy

Milpitas

0.8%

6.0%

7.3%

7.3%

9.2%

10.6%

11.4%

13.1%

14.4%

14.8%

17.9%

20.5%

21.4%

23.0%

0% 5% 10% 15% 20% 25%

Morgan Hill/Gilroy

Menlo Park (San Mateo South)

Sunnyvale/Cupertino

Fremont (880 Corridor)

Palo Alto

Milpitas

Mountain View/Los Altos

South San Jose

Silicon Valley

Downtown San Jose

US Index

Santa Clara

Campbell/Los Gatos

North San Jose

Savills Studley Report | Silicon Valley

04

Map Submarket Total

SF(1000's)

Last12 Months

ThisQuarter

%Change

fromLast Qtr.

YearAgo

ThisQuarter

ppChange

fromLast Qtr. (1)

YearAgo

ThisQuarter

%Change

fromLast Qtr.

YearAgo

Campbell/Los Gatos 3,279 137 703 -3.2% 499 21.4% -0.7% 15.2% $4.01 -0.4% $3.59Campbell/Los Gatos - Class A 1,009 43 235 -3.7% 218 23.3% -0.9% 21.6% $4.67 0.3% $3.95Downtown San Jose 8,550 667 1,266 -5.1% 1,091 14.8% -0.8% 13.0% $3.83 3.6% $3.38Downtown San Jose - Class A 3,590 325 534 -11.5% 523 14.9% -1.9% 15.3% $4.33 6.5% $4.01Milpitas 2,613 103 277 -34.0% 374 10.6% -5.5% 14.3% $2.40 -3.6% $1.70

Milpitas - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A

Morgan Hill/Gilroy 490 4 4 -41.0% 4 0.8% -0.6% 0.8% $2.46 2.1% $1.80

Morgan Hill/Gilroy - Class A N/A N/A N/A N/A N/A N/A N/A N/A $0.00 N/A $0.00Mountain View/Los Altos 7,589 689 862 74.0% 399 11.4% 4.6% 5.4% $6.12 2.7% $5.28Mountain View/Los Altos - Class A 1,454 7 411 112.6% 152 28.2% 12.6% 12.3% $7.24 10.3% $4.95North San Jose 12,981 2,946 2,982 -11.0% 2,740 23.0% -2.8% 21.1% $3.68 -0.5% $2.99North San Jose - Class A 5,841 1,964 1,514 -7.2% 1,154 25.9% -2.0% 19.8% $3.73 1.8% $3.02

Palo Alto 6,799 617 628 3.2% 630 9.2% 0.1% 9.8% $6.07 -10.9% $6.21

Palo Alto - Class A 531 126 N/A 84.2% 78 16.7% 5.0% 28.6% $3.76 -52.7% $6.77Santa Clara 14,742 1,684 3,028 3.8% 2,960 20.5% 0.8% 20.1% $3.65 -1.0% $3.28Santa Clara - Class A 7,126 1,089 1,723 9.1% 1,944 24.2% 2.0% 27.3% $3.76 -9.1% $3.59

South San Jose 3,433 779 451 83.0% 368 13.1% 6.0% 11.8% $4.30 25.9% $3.77South San Jose - Class A 844 599 254 913.6% 267 30.1% 27.1% 51.1% N/A N/A $4.08Sunnyvale/Cupertino 13,773 1,174 1,002 4.7% 669 7.3% 0.2% 5.1% $6.00 9.6% $4.27Sunnyvale/Cupertino - Class A 8,218 918 487 36.6% 261 5.9% 1.5% 3.4% $6.58 9.9% $4.80Menlo Park 4,707 191 280 20.8% 0 6.0% 1.1% 0.0% $7.15 1.7% $0.00Menlo Park - Class A 1,359 7 77 145.0% 0 5.6% 3.3% 0.0% $9.94 6.8% $0.00Fremont 2,009 311 147 2.0% 0 7.3% 0.1% 0.0% $2.77 3.0% $0.00Fremont - Class A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/ASilicon Valley Total 80,966 8,230 11,629 1.7% 9,734 14.4% 0.2% 12.3% $4.28 3.7% $3.52Silicon Valley Total - Class A 29,973 3,995 5,322 13.0% 4,596 17.8% 1.7% 16.2% $4.53 5.2% $3.71

LeasingActivity

AvailableSF

AvailabilityRate

Asking RentsPer SF

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(1) Percentage point change for availability rates. Unless otherwise noted, all rents quoted throughout this report are average asking gross (full service) rents psf. Statistics are calculated using both direct and sublease information. Short-term sublet spaces (terms under two years) were excluded. ^Unless otherwise noted, source for data is Savills Studley.The information in this report is obtained from sources deemed reliable, but no representation is made as to the accuracy thereof. Statistics compiled with the support of The CoStar Group. Copyright © 2019 Savills Studley

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