1st Quarter 2019 | 1

Real Estate Market Review

Silicon Valley R&D

1st Quarter

2019

RENTAL RATE

The Silicon Valley R&D market growth remains strong for the first quarter. Total vacancies have dropped nearly 8% to 8.1% and asking lease rates increased 11.37% year-over-year to $2.35/s.f. NNN. Last year was one of the strongest years in history. Falling vacancies and rising rents help preserve momentum for 2019.

Vacancies & Rents

Reflecting the strength of the R&D market, total vacancy rates

have continued their steady decline and now stand at 8.1%.

This rate compares with 8.4% from the last quarter and 8.8%

last year. Milpitas posted the highest direct vacancy rate at

15%. Among the major markets, Santa Clara and Sunnyvale

enjoy direct vacancy rates of 4.5% and 3.5% respectively.

Available sublease space decreased 7.8% from last quarter to

2.2 million s.f.

Average asking lease rates have increased by 11.37% year-over-

year to $2.35/s.f. NNN. Palo Alto and Mountain View continue

to be the priciest R&D markets with asking rates at $6.48/s.f.

NNN and $4.28/s.f. NNN respectively. Fremont and Milpitas

occupy the other end of the spectrum with respective asking

rates of $1.51/s.f. NNN and $1.90/s.f. NNN. Tenant demand and

low supply for newer R&D spaces will likely drive rental rates

higher for 2019.

Leasing Activity

Leasing volume in Silicon Valley remained steady with 1.8 million

s.f. of gross absorption. San Jose led all cities with 219,913

s.f. leased. Santa Clara and Sunnyvale had similar activity with

89,425 s.f. and 82,660 s.f. respectively. Allogene Therapeutics

Market Forecast

ABSORPTION

CONSTRUCTION DELIVERIES

VACANCY

Continued, page 4

Net Absorption

Total net absorption finished at 373,119 s.f. Fremont recorded the largest positive absorption with 386,330 s.f.

Rental Rates

Average asking rates rose to $2.35/s.f. NNN, up 11.37% year-over-year. Palo Alto remains the most expensive submarket with an average asking rate of $6.48/s.f. NNN.

Vacancy Direct vacancy rates decreased 7.95% year over year to 7.3%. The largest submarket, San Jose, currently has a 10.7% direct vacancy rate.

Construction Deliveries

Newly finished renovations deliver 568,606 SF to the market.

1Q 2019 Market Highlights

2 | Silicon Valley R&D Real Estate Market Review

Market Breakdown

1Q 2019 4Q 2018 1Q 2018 Annual % Change

Vacancy Rate 8.10% 8.40% 8.80% -7.95%

Availability Rate 9.60% 9.50% 10.80% -11.11%

Asking Lease Rate $2.35 $2.30 $2.11 11.37%

Leased SF 717,644 1,583,926 1,712,825 -58.10%

Sold SF 1,636,097 2,531,621 2,078,689 -21.29%

Net Absorption 373,119 714,311 -185,182 N/A

Silicon Valley R&D Charts

Direct Vacancy Total Available Direct Lease Rate

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

0%

5%

10%

15%

20%

25%

VACANCY & AVAILABILITY

Average Sales Price (PSF) Cap Rate

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD$100

$150

$200

$250

$300

$350

$400

0%

2%

4%

6%

8%

10%

12%

AVERAGE SALES PRICE & CAPITALIZATION RATES

Net Absorption (SF) New Deliveries (SF)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD

-2.0M

-1.5M

-1.0M

-500K

0

500K

1.0M

1.5M

2.0M

2.5M

3.0M

3.5M

NET ABSORPTION & COMPLETED CONSTRUCTION

Sales Volume (SF) Lease Volume (SF)

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 YTD0

2M

4M

6M

8M

10M

12M

SALES VOLUME VS. LEASE VOLUME

1st Quarter 2019 | 3kiddermathews.com

R&D Submarket Statistics

SubmarketTotal

Inventory

Direct Vacancy

Rate

Total Vacancy

Rate

Total Available

Rate

1Q Direct Net Absorption

1Q Total Net

Absorption

YTD Direct Net Absorption

YTD Total Net

Absorption

1Q Leasing Activity

YTD Leasing Activity

Avg NNN Rental Rate

Campbell 1,432,883 3.20% 3.20% 3.20% (4,025) (4,025) (1,040) (1,040) 29,794 35,538 $2.56

Cupertino 2,287,558 0.70% 0.90% 0.90% (13,220) 3,270 6,103 2,481 - 20,100 $2.72

Fremont 17,242,916 7.10% 7.50% 6.50% 373,044 386,330 (25,735) (44,579) 67,724 1,614,987 $1.51

Milpitas 9,416,243 15.00% 16.20% 16.20% 50,215 41,437 (416,188) (508,199) 5,882 462,068 $1.90

Mountain View 8,131,171 4.90% 6.10% 5.60% 34,899 62,660 (115,437) (140,228) 36,956 490,581 $4.28

Newark 3,729,570 0.80% 1.60% 0.90% (15,884) (15,884) 235,088 208,080 184,290 93,612 $2.12

Palo Alto 4,585,755 1.40% 2.20% 2.20% 72,121 35,521 38,061 161 1,000 216,051 $6.48

San Jose 39,244,351 10.70% 11.80% 9.20% (165,318) (256,945) 273,067 332,938 219,913 1,558,484 $2.08

Santa Clara 17,927,730 4.50% 4.80% 3.60% (43,763) 66,877 417,673 445,549 89,425 705,969 $2.35

Sunnyvale 16,406,970 3.50% 4.40% 2.80% 55,887 53,878 245,728 135,390 82,660 938,256 $2.92

Total 120,405,147 7.30% 8.10% 6.60% 343,956 373,119 657,320 430,553 717,644 6,135,646 $2.35

Notable Lease Transactions

THOUGHTSPOT

Central Research Park Sunnyvale

74,652 s.f.

MILTENYI BIOTEC

2825 North First St San Jose

51,578 s.f.

Notable Sale Transactions

HINES

Oakmead West Sunnyvale

431,095 s.f. $188M or $436/s.f.

ALEXANDRIA REAL ESTATE

3160-3170 Porter Dr Palo Alto

96,000 s.f. $100.25M or $1,044/s.f.

ALLOGENE THERAPEUTICS

7400 Gateway Blvd Bldg 1 Newark

117,889 s.f.

ROCHE

Central Campus Santa Clara

312,000 s.f. $140.5M or $450/s.f.

4 | Silicon Valley R&D Real Estate Market Review

Kidder Mathews is the largest, independent commercial real estate firm on the West Coast, with 800 real estate professionals and staff in 22 offices in Washington, Oregon, California, Nevada, and Arizona. We offer a complete range of brokerage, appraisal, property management, consulting, project and construction management, and debt equity finance services for all property types.

ASSIGNMENTS ANNUALLY

TOTAL # APPRAISERS/MAI’S

MANAGEMENT PORTFOLIO

51M+ 1,600+

PROPERTY MANAGEMENT VALUATION ADVISORY

36/23

ANNUAL TRANSACTION

VOLUME

$9B

ANNUAL LEASING SF

40M

ANNUAL SALES SF

20M

COMMERCIAL BROKERAGE

# BROKERS

380+

This information supplied herein is from sources we deem reliable. It is provided without any representation, warranty or guarantee, expressed or implied as to its accuracy. Prospective Buyer or Tenant should conduct an independent investigation and verification of all matters deemed to be material, including, but not limited to, statements of income and expenses. CONSULT YOUR ATTORNEY, ACCOUNTANT, OR OTHER PROFESSIONAL ADVISOR.

Contact

The information in this report was composed by the Kidder Mathews Research Group.

Jerry Holdner

Director of Research 949.557.5050 jerry.holdner@kidder.com

Eric Luhrs

Regional President, Brokerage Northern California / Nevada 408.970.9400 eric.luhrs@kidder.com

Designated Broker

Mark Read | LIC # 00572743

kiddermathews.com

signed the largest lease of the quarter, taking 117,889 s.f. at

Building 1 in the new Gateway 84 industrial park in Newark.

Thoughtspot leased 74,652 s.f. in Central Research Park in

Sunnyvale. Rounding out the top three leases, Miltenyi Biotec is

occupying 51,578 s.f. at 2825 N First Street in San Jose.

Net absorption for the first quarter finished at positive 343,956

s.f. Fremont provided the bulk of this change, registering

386,380 s.f. of positive net absorption. Santa Clara and

Sunnyvale recorded 66,877 s.f. and 53,878 s.f. of positive net

absorption each.

Currently, there are 428,084 s.f. of R&D properties under

construction in Silicon Valley. 3181 Porter in Palo Alto has

102,084 s.f. under development. This project is 100% preleased

to Jazz Pharmaceuticals. Intuitive Surgical is also constructing

326,000 s.f. in Sunnyvale for its own use. In addition, newly

renovated properties in North San Jose and Santa Clara are

delivering 568,606 s.f. of high-quality space. These construction

and renovation projects help satisfy the 11 million plus s.f. of

R&D requirements that Kidder Mathews tracks, signaling a

robust R&D demand.

Investment

Investor anticipation for R&D market growth remains strong as

sales volume reach 1.6 million s.f. this quarter. Hines completed

the largest transaction of the quarter, purchasing Oakmead

West in Santa Clara from Deutsche Asset Wealth Management.

Roche completed the next largest deal with the acquisition

of its Santa Clara offices from the joint venture of Rockpoint

Group and Presidio Investments in Santa Clara. Colony Capital

purchased a portfolio of six properties in Fremont from Dermody

Properties. This was part of a massive national 56 property

portfolio. Dermody last purchased the Fremont properties from

May 2017-April 2018 and nearly doubled their investment with

this recent sale. The quick turnaround helps point to the high

prospects of the Silicon Valley R&D market. Strong property

sales are anticipated as investors search for high quality

R&D properties.

Source: CoStar, Silicon Valley Business Journal