Silicon Valley Real Estate: Investment World’s New Hot Topic

The San Jose housing market is cooling off.

That much is common knowledge. However, despite the drop-off in California mortgage loan demand, Silicon Valley real estate has become the new darling of the real estate investment world, brokers at a Commercial Real Estate Women luncheon said last week.

Erik Doyle, a broker with CB Richard Ellis, who handled last year’s sale of the Peery-Arrillaga real estate investment trusts to RREEF for $1.1 billion, said he believes much of the sizzle in the South Bay can be credited to venture capitalists.

Those investors, who believe there is still money to be made from investing in real estate, are thought to pour more than a third of their money into companies within 30 miles of Palo Alto.

“That coupled with strong demand for space … makes the valley very much in demand among institutional buyers,” Doyle said.

Another sign that the valley is one of the up-and-comers in commercial real estate is the Blackstone Group’s apparent decision to hold onto the South Bay buildings just acquired in its $39.2 billion buyout of Equity Office Properties.

Blackstone, Doyle noted, is selling portions of the EOP portfolio in San Francisco, Sacramento and elsewhere, but so far has held tight to other major developments within the Silicon Valley region, where housing prices are already sky-high.

Before the acquisition by Blackstone, EOP owned 580 buildings with more than 108 million square feet in 16 states and the District of Columbia.

Doyle also observed that the face of ownership is changing as developers who built the valley - he called them “cowboy developers,” such as Joe Lewis, Richard Peery and John Arrillaga - are now selling off their real estate holdings to institutional investors.

“The big-money guys are not emotional about their real estate. These people move their money very quickly,” he said. “It’s different than with the Peerys, Arrillagas, Bergs and Sobratos, who build and hold or buy and hold. … This is exciting for the valley.”

All coming at a time when home loan demand is plummeting in the residential real estate market, sparking concern that a recession may soon follow.

But that’s not deterring developers or jobs from focusing in on the area.

Legacy Partners is “dusting off” its blueprints for its second River Park Tower on West San Carlos Street and expects to file plans with the San Jose Planning Department in the next week.

Moreover, a 17-story, 300,000-square-foot tower is now underway, one that would serves as a replica of the downtown tower built in 2001, according to Steve Dunn, Legacy’s vice president.

“That doesn’t mean we’re definitely going forward. But we do believe the market is coming back. There’s all sorts of indications: absorption of space, new jobs being filled and now an increase in rental rates.”

SOURCE: San Jose Mercury-News