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Silicon Valley real estate shows almost no slowdown in tech

Silicon Valley map
Zimmytws | Getty Images

Despite a slowdown in tech startup funding and a hammering of certain public tech stocks earlier this year, Bay Area commercial real estate is as hot as ever.

"There has been a lot of negative banter about tech slowing," said Hudson Pacific Properties CEO Victor Coleman. In fact, quite the opposite is happening, he said. "Even as certain private companies reign in on expenses, they continue to view the growth of successful business lines and recruiting as paramount, which impacts their space needs positively," Coleman said.

This time, the growth is being led by big, established players.

Alphabet's Google and Apple inked the biggest real estate deals in the second quarter of this year, collectively leasing some 230,000 square feet of additional office space in Silicon Valley, according to real estate firm Newmark Cornish & Carey. The two tech giants are already among the largest property owners in the Valley and both added space in Sunnyvale, Calif. which sits in the heart of Silicon Valley adjacent to their sprawling campuses.

"Apple, Google, Facebook and Linkedin continue to expand outside of their respective campuses," said Christan Basconcillo, Silicon Valley research manager for real estate firm Jones Lang LaSalle. "However, with conditions becoming very tight from an availability standpoint these companies are starting to push into Santa Clara and North San Jose, most notably Google and Apple."

Landlord asking rates increased in almost every city in Silicon Valley in the second quarter, approaching a $1 per square foot premium over the previous peak of 2007, said Newmark Cornish & Carey.

The other biggest deals came from the China-headquartered Cambridge Industries Group — which partners with firms to help with R&D and manufacturing — and venture-backed augmented reality rising star Magic Leap. Overseas tech companies are helping to drive momentum, as more and more foreign firms plant flags in the Valley, said Basconcillo.

The capital of Silicon Valley: downtown San Jose, California
Geri Lavrov | Getty Images
The capital of Silicon Valley: downtown San Jose, California

Big tech companies are snapping up every available square foot, as there is huge demand for large office spaces, which continue to be in short supply. The industry accounted for more than 3.7 million square feet out of a total 5.9 million square feet in San Francisco alone, with tenants seeking more than 50,000 square feet accounting for 3.7 million square feet of demand, reported said Newmark Cornish & Carey.

At the same time, there is evidence of slowing in the some corners of the market, likely the result of a cooling in start-up funding and smaller players getting squeezed out. Subleasing activity in San Francisco — often associated with tough times in startup land — rose slightly as more space became available, said JLL.

Even so, there was plenty of demand there as well. So far this year, 1.1 million square feet of sublease space has already been absorbed and the sublease market saw a net gain of 500,000 square feet in available space, according to Newmark Cornish & Carey. While this is often seen as a sign of the market cooling, demand is so high that space is quickly snapped up, said Basconcillo.

"With tech tenants still wanting to go where millennials are flocking to, it's expected that much of the sublease space will be absorbed quickly," said Basconcillo.

Fitbit and Lyft signed the biggest San Francisco sublease deals in the quarter, taking over a collective 437,000 square feet in office space from Charles Schwab and cloud storage company Dropbox respectively, Newmark Cornish & Carey found.

HPP, which is one of the biggest commercial real estate owners in the Bay Area, is a major beneficiary of tech's growth — its stock neared an all-time high last week after the company reported earnings which far exceeded its own expectations.

So far this year, the firm has signed deals to rent office space in San Francisco and Silicon Valley with tech and non-tech clients including Salesforce, Qualcomm, Toyota Research Industries and Uber, which leased more office space in HPP's mid-market building, close to Twitter's headquarters.

A man leaves the headquarters of Uber in San Francisco.
Eric Risberg | AP
A man leaves the headquarters of Uber in San Francisco.

"There's a lot of back log of tenants that are looking at space," said Coleman. "The demand is very high."

Uber has continued its growth march, expanding both inside and outside of downtown San Francisco. The company's planned expansion to the East Bay, slated for 2017, will add almost 3,000 employees and 330,000 square feet of renovated space in Uptown Oakland, making Uber by far the biggest migrant into the area since 2010, JLL noted in its Summer 2016 report.

Oakland has emerged as the city with the fastest growing office rental growth globally over the past year, according to a new study from JLL. The growth has also been largely fueled by the tech industry, which now occupies a third of commercial real estate in the East Bay.

Downtown Oakland, California.
Jerry Trudell | Getty Images
Downtown Oakland, California.

As commercial tenants look outside San Francisco, they are increasingly looking to the East Bay with its young population, lower rates and proximity to San Francisco, Silicon Valley and international airports.

At least one large tech company isn't expanding in the city, though.

On Monday, The San Francisco Business Times reported that Twitter had listed more than 183,000 square feet of its marquee San Francisco headquarters according to marketing materials and people familiar with the matter.

"We're always looking at ways to use our office spaces more efficiently and effectively," a Twitter spokesperson told CNBC. "We remain committed to our home in San Francisco's mid-Market area."

Twitter headquarters in San Francisco.
Adam Jeffery | CNBC
Twitter headquarters in San Francisco.