Palo Alto ‘Stuck In A Rut,’ Mayor Says Following Palantir Exit

To some, including Mayor Adrian Fine, big data company Palantir's exit from Palo Alto is much less shocking than it is frustrating.

“Aside from some community criticisms of their business model, in the current economy, it’s not a good thing for Palo Alto to lose a large employer," Fine said, citing backlash Palantir has received for its work with the U.S. Immigration and Customs Enforcement. 

Like many Bay Area office experts, Fine doesn't expect the space Palantir leaves, which has yet to be specified, to stay vacant for long. But he said it does represent an increasingly common instance of a big employer leaving Palo Alto.

“In the past four or five years, who’s left? We used to have SurveyMonkey, we used to have HP, a bunch of others like Salesforce used to have a presence down here," Fine said. “Palo Alto is really, in my opinion, stuck in a rut. It disappoints me because I’ve been here my whole life, and I think Palo Alto is a great place."

Office brokers in the region said they don't see Palantir's exit from Palo Alto as a terrible setback or reflection of the office market's appeal to bigger users.

“From a real estate perspective, it’s not the incident that I think people think it is from the outside," Colliers International Senior Vice President Mike Cobb, a Peninsula market veteran, said in an interview. "It's always been the most desirable market in this region."

That desire is reflected in the city's rents, which are only on par with downtown San Francisco. As of last quarter, average asking annual Class-A rents in Palo Alto came out to just under $125 per SF, according to CBRE. Like Palo Alto, Redwood City also offers proximity to Stanford, access to other sources of talent and the lower Peninsula's nice weather, and has slightly more flexible pricing, Cobb said.

“The closest competitor, if you will, to downtown Palo Alto, is Redwood City," Cobb said. "It offers a lot of the same benefits. The rents suggest that Palo Alto still has more appeal.”

Fine said the city's office market has "lost its luster" for a few big reasons, one of which is the high rents, which are reflective of demand but also a sign of an anti-growth stance he said plagues the city. Palo Alto is notorious for its lack of housing production, and it also doesn't have much new office space, which has led more companies to shinier product found in Redwood City, Sunnyvale and other Silicon Valley submarkets, he said. 

“While other communities are building hundreds of thousands or millions of SF of office space and thousands of units of housing, Palo Alto is doing nothing," Fine said. "We don’t have any commercial projects in the pipeline, and we build something like 40 or 50 housing units a year, and most of them are granny units,[accessory dwelling units] or backyard cottages.”

In addition, in the coming recovery period, the city's office market might lag behind the rest of the Bay Area.

Palo Alto is distinct from other Silicon Valley submarkets like Cupertino, the home of Apple, and Mountain View, that of Google, for its preponderance of venture capital-backed startups and relative lack of publicly traded tech giants, according to CBRE Tech Insights Center Executive Director Colin Yasukochi. 

It's a dynamic that is even stronger now with Palantir's apparent exit, and it may slow down the city's office market recovery. Yasukochi said much more sublease space has been made available in S.F. partially because of its larger proportion of venture-backed and newly public companies, but leasing velocity is down all the same. 

"That's been pretty consistent across all Bay Area markets," Yasukochi said. "Leasing activity in the office sector is down across the Bay Area anywhere from 70 to 80%."

A short-term shift to more remote work could also exacerbate the office market recovery. 

“We’re going to have a lot of extra office space because people are rethinking how their business is going to be set up with a hybrid workplace," HelloOffice Silicon Valley Managing Director Jon Moeller said. "We’ll adopt, without a doubt, a more flexible work environment because of this."

Cobb said he thinks Palo Alto's office market will bounce back relatively quickly, pointing to what followed Facebook's departure from the city early last decade during a similarly slowed economy. 

“They gave up 100K SF to move to their current headquarters in Menlo Park, and they were at the time far and away the biggest tenant in downtown," he said. “Everyone was nervous about what that would do to the market. Even in that bad market, that space was leased in a pretty orderly fashion."

Cobb also said Palantir's move is also much less sudden than it might seem. As of five years ago, they occupied between 250K SF and 275K SF in downtown Palo but started subleasing out large amounts of space within the last two years, he said.

Current Palantir offerings include about 10K SF at both 164 Hamilton Ave. and 300 Hamilton Ave., both of which are near the company's erstwhile headquarters at 100 Hamilton Ave. The company may also keep part of its existing Palo Alto footprint, Palo Alto Weekly reports.

Palantir didn't respond to a request for comment.

Whether they do or don't keep that footprint, Palantir likely won't be the last big company to look outside the Bay Area for growth or a new headquarters, according to Yasukochi. 

“Many of these Bay Area-headquartered tech companies have been expanding across the country for many years," Yasukochi said. "The fact that some of them decide they’re going to grow more in a market outside of their headquarters is sort of nothing new because many of them have outgrown the Bay Area, so we expect that to continue."

That might be little consolation to Fine, who announced last month he is not seeking re-election.

“I really fear the community has become far too antagonistic to office space and commerce, frankly,” he said.