Silicon Valley Commercial Property Boom Ends, Totally Exposed to Big-5: Apple, Google, Facebook, Amazon, LinkedIn

This could get very ugly!

Apple shares have plunged 32% from June last year, and $282 billion in shareholder wealth has evaporated, on swooning sales and crummy data from suppliers. Today shares fell briefly below $90 for the first time since June 2014. But still, Apple’s market capitalization is about $507 billion. And Alphabet’s is $498 billion.

Along with Facebook, Amazon, and LinkedIn, they constitute the Big Five in Silicon Valley, with a giant footprint on commercial real estate that continues to grow. So just how exposed is Silicon Valley’s office market to a slowdown among the Big Five?

Already, there are cracks in the foundation. According to the Q1 report by commercial real estate services firm Savills Studley, overall asking rent rose by 7.1% year-over-year, and vacant availability edged down to 7.6%. But deal volume for the past four quarters plunged 14% year-over-year to 7.5 million square feet (msf).

“Overall, this signals a shift to a more subdued market,” the report explained. Yet the big tech companies were still in an “unrelenting pursuit of talent and office properties” despite “growing concern about the challenging conditions for start-ups and a weak IPO market.”

But compared to San Francisco, leasing fundamentals “have not contracted as sharply.” Because in San Francisco, all heck is threatening to break loose.

In Silicon Valley, it comes down to the big tech companies. And that 7.5 msf leased over the past four quarters doesn’t include the slew of purchases by Google, Microsoft, and Facebook.

The red flag in the office market is sublet space. Companies that have big ideas about growth, and that perceive an office shortage, will lease more space than needed and warehouse that space until needed. But when the market turns for them, and they’re under pressure to cut costs, they’ll trim their headcount and put the vacant office space on the sublet market. This supply that materializes overnight creates a glut, and lease rates begin to swoon.

While sublet supply in San Francisco “has soared to its highest mark since 2010,” according to Savills Studley, it’s still more subdued in Silicon Valley. It is being watched nervously, after the beating that startup valuations have been taking, the “down rounds” of funding, the shut-downs, and even bankruptcies.

And there’s a new thing to fret about, according to the report:

Intel’s potential sale of its venture capital business could further exacerbate the devaluation of tech stocks. During 2015, Intel invested $514 million in 143 companies including innovative new security software and wearable device companies. If they unload these investments at a loss it could have a corrosive effect on other investors in the same or similar companies.

That would be the worst-case scenario.

And then there’s the issue of staffing:

Stock devaluations also hurt the ability of newer startups to compete with established tech firms for talent. Until recently startups could dangle equity stakes in front of talent as part of a recruiting package, now prospective employees – much like investors – are likely to focus on the “potential” value of these stakes.

Additionally recruiters specializing in tech sector placement have started to note a slowdown in the quit ratio. Talent is becoming a bit less demanding and less willing to jump to newer companies who offer a big stake in a new enterprise. As one commentator recently said, talent is becoming “wary of boarding a sinking ship.”

But the big tech companies remain aggressive in the real estate scene. Apple is building itself an immense circular palace.  And Google is out there grabbing what it can. In December, it signed a 111,443 sf lease for the entirety of 1001 N Shoreline in Mountain View. It agreed to buy NetApp’s eight-building, 600,000-sf campus. And in March Google leased the 280,000 sf at Moffett Towers in Sunnyvale that Motorola, which is slashing its workforce, no longer needs. Motorola will keep just one 40,000 sf floor. Facebook, Apple, and Microsoft have also been on a “buying spree of late.”

So how exposed is Silicon Valley’s commercial real estate market, after the multi-year boom phenomenon, to a downturn at Apple, Google, Facebook, Amazon, and LinkedIn?

Since 2010, the Big Five have leased 14% of all office space coming on the market in Silicon Valley from Mountain View on south, according to data from Newmark, Cornish & Carey, a top commercial real estate firm in the Bay Area. This includes 51% of all new developments completed or still under construction since 2010.

Just five companies leased 51% of all new developments! This is in addition to the buildings and campuses the Big Five built and bought outright.

And there has been a construction boom. According to data from Newmark, Cornish & Carey, as of April, there are about 9.4 msf under construction, including Apple’s 2.8 msf palace. About 74% of the new construction has been preleased.

So what happens when the tech market turns, and when the layoffs spread from smaller companies, and from Motorola and Yahoo and the like to the Big Five, and they dump some of the vast leased space they’re now warehousing for future use on the sublet market?

Everyone here who’s been through this before knows what will happen. Sublease space will skyrocket. It will turn the market upside down. Demand will evaporate overnight. The market will become illiquid. Deal volume will crater. Lease rates will follow. This is always how it happens after such a boom.

“All it takes is a couple of big tech companies folding and the floodgates open, causing the sublease market to blow up, rents to drop, and new construction to grind to a halt,” according to Savills Studley new report on San Francisco. Read…  “Market is on Edge”: US Commercial Real Estate Bubble Pops, San Francisco Braces for Brutal Dive

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  25 comments for “Silicon Valley Commercial Property Boom Ends, Totally Exposed to Big-5: Apple, Google, Facebook, Amazon, LinkedIn

  1. hidflect says:

    Facebook’s P/E ratio is 80. Given that they’re pretty much at saturation in users, I don’t ever see them clawing that below 50 without a massive stock price “readjustment”. So if a lot of equity gets destroyed for that company and others I imagine that will pile onto the RE woes from the other end. Millions will suffer a reverse wealth effect and snap shut their wallets.

    • Shawn says:

      FB says the have 1.6 billion users. I have 3 FB accounts and I don’t use any one of them except to surf without being tracked.

  2. ML says:

    Nobody forces investors to stick when it might make more sense to get out. If greed gets the better of them then they only have thmselves to blame. We should not shed a tear.

  3. bead says:

    I thought we were nearing the glory of mobile phone advertising using Big Data. Once my favorite micro-brews were duly recorded in The Cloud, then I could tell my Uber driver where to drop me off next, having examined my coupons. With such enormous ramifications it’s hard to believe the startups won’t find new money.

    • Wolf Richter says:

      What Uber driver? You’ll be in a self-driving Uber car….

      • bead says:

        Hadn’t thought of that, although I wonder where manufacturer’s liability fits in that dream scenario. That will make the car too expensive for the hoi polloi and unthinkable for the wealthy. Lawyers would be drooling over the prospect of self driving cars. I remember Google Glass, seemed like a brilliant notion to nerds but it went poof after it was parodied on TV.

  4. Nicko says:

    Honestly what’s the problem here? Buy low, sell high, repeat.

    There are still several billion people on this planet who aren’t connected to internet own a mobile phone, or even have electricity, this too shall pass.

    • MC says:

      Actually if you go to Africa or South Asia you’ll find mobile phone ownership is surprisingly high: for many people with no access to landlines it is the cheapest and most convenient way to keep in touch with friends, family and the rest of the world.

  5. Uncle Frank says:

    In yet another sign of a slowdown in the booming Bay Area economy, tech layoffs more than doubled in the first four months of this year compared to the same period last year.

  6. Arbuthnot says:

    It already is ugly. Just look at the tenants. Apple: a business at the point of saturation and too big to grow? If the smart phone is approaching commodity status, does Chinese Uber provide an answer or does it smack of desperation? And then there’s the circular palace, running way over original cost estimates, a classic case of the edifice complex which, in turn, is a nearly flawless indicator that the cycle has topped.

    I wonder if Apple isn’t the ideal poster boy for many of the current silicon valley wunderkinds, who, like their predecessors everywhere, have their day in the sun, enjoy spectacular growth, mature and die. Think of Intel, Hewlett Packard, IBM, Digital Equipment, Polaroid, Eastman Kodak, International Flavors and Fragrances, General Motors, US Steel, New York Central….. and thousands of other one time “growth” stocks that stopped growing.

    The wise investor will remember that trees do not grow to the sky. Corny but true.

    • Bo Jenry says:

      Speaking of edifice complexes as symptoms of market peaks, what about the Salesforce tower? “Tallest building west of the Misissippi”.

      Pretty rich for a company that consistently fails to eke out a profit

      • Wolf Richter says:

        Salesforce doesn’t own the thing. It leases way too much space in it and gets to put its name on the building. When it moves into it in a year or two, Salesforce will have lots of empty space which it will likely try to sublease. The sublease market in SF is already going haywire, as tenants are trying to unload their vacant space. By then, the office market in SF will be in the process of unraveling. So this is going to be interesting to watch.

  7. Chicken says:

    This super-nova consumer-driven economy (nova in espanol means no-go) needs an immediate FED rate hike (it’s about time for FED to screw cluless retail investors again) to avoid uber-hot overheating.

    Besides, consumption is death for the environment.

    Rinse and repeat.

  8. Michael says:

    Good riddance to the tech nonsense.

    • MarkB says:

      During the first tech boom, I was an engineer designing high performance microprocessors for all of the cool things we were going to do… solving big physics problems; energy, medicine!

      This ‘boom’ we got 140 characters. Where’s the flying cars!

      Ok, I didn’t think that one up. Can’t remember where I heard it, but it summarize the way I feel.

      I’m sorry, but compared to helping create the first multi-core microprocessor, Twitter is NOT tech. Its trivial coding compared to Linux, another piece of *real* technology coming out of the first boom.

      • Wolf Richter says:

        Twitter is dying. The more they tweak it, the worse it gets. I see the usage patterns. They’re terrible. But the real innovations (your multi-core processors, for example) will continue to push to the next level, always…

        Facebook is another animal altogether. It put itself in the sweet spot of the internet.

      • Shawn says:

        “This ‘boom’ we got 140 characters. Where’s the flying cars”

        How true, some of today best engineers sell ads and count clicks in the Google/FB underverse.

  9. Lars says:

    Remember, Google IS the Government.
    It was bankrolled by In-Q-Tel the VC arm of the CIA in its early days.
    (Facebook was funded by the NSA)
    Being a bit out of touch with the markets these days, that GOOG changed its name to Alphabet was a surprise, but seeing as how it was the Goverment alphabet agencies who funded GOOG it’s not such a surprise that they’d pick Alphabet for a new name moniker, as Google has become a dirty word representing evil in the minds of many many Sheeple.
    Alphabet is actually the Holding Company for Google, “Big Brother and the Holding Company” seems to have come full circle from the 1960’s ! and my guess is that GOOGL will use all that unfilled office space for the Government employed minions (who desperately need a job when the big tech crash comes) to be internet trolls promoting and policing the internet to make sure government policies are being adhered to, and to report violators of official policy on chat boards etc, , just like they have in China.

    • Wolf Richter says:

      In-Q-Tel didn’t fund Google. It was an early investor in a company (Keyhole) that Google later bought for a whole bunch of money and whose technology Google incorporated into Google Earth.

      Google might also have bought other companies where IQT was an early investor.

      • Chicken says:

        Fascinating, isn’t the US government the single largest global employer? Seems like a high price to pay for freedom.

        • Chicken says:

          What about military contractors, wowsa! I thought the name of the game was “Skate to where the puck will be.”? Yet among the noise of “buy gold” or some other such nebulous security that habitually takes a dive and ends in disaster, I rarely hear calls for chasing military contractor stocks, best kept secret ever, the real gold.

      • Rico says:

        How the CIA made Google | Inside the secret network behind mass surveillance, endless war, and Skynet—
        part 1
        By Nafeez Ahmed

        INSURGE INTELLIGENCE, a new crowd-funded investigative journalism project, breaks the exclusive story of how the United States intelligence community funded, nurtured and incubated Google as part of a drive to dominate the world through control of information. Seed-funded by the NSA and CIA, Google was merely the first among a plethora of private sector start-ups co-opted by US intelligence to retain ‘information superiority.’
        The origins of this ingenious strategy trace back to a secret Pentagon-sponsored group, that for the last two decades has functioned as a bridge between the US government and elites across the business, industry, finance, corporate, and media sectors. The group has allowed some of the most powerful special interests in corporate America to systematically circumvent democratic accountability and the rule of law to influence government policies, as well as public opinion in the US and around the world. The results have been catastrophic: NSA mass surveillance, a permanent state of global war, and a new initiative to transform the US military into Skynet.


  10. polecat says:

    Geeze…….Whocuoldadone the tech bubble 2.0 was gonna pop!

    I SO feel for our tech titan overlords…………NOT!

    • Chicken says:

      Yet still no discussion of a military contractor bubble, militarization concerns me more than tech, heck tech might even rally another 100% once they get their next round of government funding military contractors are unable to absorb.

      Forget about the shyster stocks POTUS keeps advising to buy, all the fraudsters got there first to load it with debt and poor business models knowing full well the only manufacturing that occurs on these shores is weaponry.

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