Silicon Valley's Future Remains Positive, Despite Impending Slowdown

Silicon Valley tech has long been a part of a major evolution in office space. Developments are focused more on amenities today to provide employers a way to attract high-quality talent.

Developers, designers, brokers and consultants gathered in San Jose last week to discuss the Silicon Valley real estate market and where things are headed.

RMKB partner and Bisnow event moderator John Dooling, along with panelists Landbank CEO Scott Jacobs, The Sobrato Organization director of leasing and acquisitions Chase Lyman, Jay Paul Co. chief investment officer Matt Lituchy, Newmark Cornish & Carey vice chairman Phil Mahoney, Sares Regis Group chief operating officer Ginger Bryant and Cushman & Wakefield executive managing director Jeff Cushman, told a crowd of 150 about what drives economic activity in the Valley and about future projects.

Santa Clara mayor Lisa Gillmor (above) kicked off the event as keynote speaker, providing the history of Santa Clara and how development got started there. Her father, Gary Gillmor, was the first elected mayor of Santa Clara. He partnered with Don Von Raesfeld to build up the city. Their goals were to make sure Santa Clara had a strong tax base, created jobs and provided the best city services possible to attract employers and residents.

They bought as much real estate as possible because they felt by doing so they could control the future of Santa Clara, she said. They also did not want to have unfettered housing projects like those that were cropping up in Sunnyvale. Santa Clara initially resisted efforts to build housing in the north, but times have changed.

“[Development] wasn’t by accident. It was a well-thought-out plan and vision for development in our community, and now we can’t stop the development. It’s coming so fast and furious,” Gillmor said.

Santa Clara had to allow residential in the north Bayshore area. One of the biggest projects in the works is the mixed-use development of Santa Clara Square, which will have residential next to business.

The culture of innovation in the Valley will continue to attract employers and drive more development, panelists said.

“We’ve got this great culture of creativity, innovations, reinventions, unbridled optimism and the idea that almost anything is possible,” Landbank CEO Scott Jacobs (above left) said.

Founders who are successful often invest in new founders’ ideas, Jacobs said. Access to talent and capital to support those great ideas is readily available, according to The Sobrato Organization director of leasing and acquisitions Chase Lyman (above right).

Building To Meet Tenant Demands

With the need to attract highly educated and talented employees, a shift toward providing amenities has been ongoing. Grandiose campuses were groundbreaking 15 years ago, but are now standard.

“[You have to] build a building that is part of a bigger place where you can live, work and play,” Cushman & Wakefield executive managing director Jeff Cushman (above) said. “That’s where we are and where we are headed.”

Jay Paul Co. started large-scale campus projects over a decade ago building soccer fields, baseball diamonds and a 40k SF resort-style fitness center when these types of amenities were unheard of, according to Jay Paul chief investment officer Matt Lituchy (below). Now, you have start with the bare minimum of a fitness center, outdoor space and breakout rooms.

"There’s a real emphasis on large spaces to have all-hands meetings, [whether] that’s an outdoor amphitheater or indoor amphitheater,” Lituchy said. In one instance, Jay Paul built fitness amenities for a large client only to have the client scrap the plan and convert the space into a meeting and conference center.

While Jay Paul is the developer behind the 800-foot-tall 181 Fremont tower in San Francisco, Lituchy said most of its developments are in Silicon Valley. In Sunnyvale, the firm is finishing a 800k SF project with pre-leases from Apple. Another phase of Moffett Towers in the works was pre-leased to Amazon. The firm will soon be breaking ground on a 350k SF spec building.

Lyman said Sobrato also is trying to provide bigger floor plates even though that may mean having dark spaces in places. To work around the issues of large floor plates, Sobrato added a 4k SF atrium in the middle of a building with 55k SF floor plates in East Palo Alto. The four-level atrium provides a meeting place where a company executive can stand at the top of the stairs and do a company meeting or product launch.

Instead of adding a lot of technology to its designs, Landbank unwinds what it considers to be poor design choices within existing buildings and prefers simple things like bringing nature into the environment, providing better access to daylight, providing natural ventilation and providing easy access to outdoor space, Jacobs said.

Given the race to create better amenities, landlords need to create a balance — not going so far that rental prices become too high, Cushman said. When it comes to non-tech tenants like law firms and professional services, they are really focused more on the cost and don’t have huge fluctuations in space year-over-year.

The same concepts hold true for multifamily, said Sares Regis chief operating officer Ginger Bryant (above). Tenants want a place with high energy, activity and retail when it makes sense. Amenities like WiFi throughout the building and package lockers are often deal-makers for tenants.

Sares Regis is working on eight projects worth about $1B. The developer kick-started the Sunnyvale Town Center project late last year that will bring 198 residential units back online after sitting unfinished for years. Retail and office will be added to the transit-oriented development near Caltrain.

The developer will soon start selling condos in Mountain View at its El Camino Real project. That project will have EV charging stations with smart technology that can better balance the power load to the building. An apartment complex in San Jose called The Pierce just opened this month, adding 242 apartments to downtown as well as an LED public light installation.

Challenges To Development

Despite the ongoing need for more housing and office, challenges related to the political environment, community pushback and slow permitting processes continue to stall development. Newmark Cornish & Carey vice chairman Phil Mahoney (above) said NIMBY-ism is among the biggest challenges because it self-creates higher housing prices.

“City officials need the political will to step up to the vocal minorities to say, ‘I know you’re loud, but that doesn’t make you right,’” Mahoney said. Cities have to communicate better by telling citizens the city wants to create enough housing for current and future generations.

Jacobs said developers need to do a better job communicating with the community and responding to community needs. If the region can be better at addressing bigger issues of housing, income inequality, cost of living and traffic, it will be great in the long term, he said.

How Technological Advancements Will Change Developments

Jacobs said the biggest impact on the industry will come from self-driving cars and an increase in life expectancy. Higher density of employees within office space is leading to a bigger need for parking, but self-driving cars will move people away from car ownership to a car service model. He said developers need to find a way to design a parking structure that is adaptable. Developers will need to rethink ceiling heights, bay depths and load-bearing capacity. A need for parking is not going to go away since self-driving cars will need a place to sit while inactive.

Lyman said one alternative his firm is considering is having designated parking for residents and office tenants in mixed-use developments and then have swing spaces for office to occupy from 8 a.m. to 6 p.m.

An increase in density within offices where some social media companies have 125 SF/person is creating a new challenge with parking. Some cities mistakenly cut parking down, but end up cutting an employer out who still needs that parking, Mahoney said. Older employees also are not as willing to give up their cars immediately.

An Eye On The Future

Panelists agreed Silicon Valley will remain attractive for years to come, but short-term uncertainty could slow the market down. Cushman said if cities and companies are too resistant to policies coming out of the White House, the Bay Area runs the risk of losing money that could improve infrastructure. Companies could even move elsewhere to create a new Silicon Valley.

Lituchy said Silicon Valley will remain the center of technology where world-leading products are produced. He said with over 3 billion people still without internet, there is still plenty of need for more technology. Mahoney said he’s bullish about the long-term future, but short-term uncertainty with capital markets could lead to a slowdown.