A Bifurcated Valley?

| February 13, 2012 | 0 Comments

There’s nothing too surprising any more about reports that cover the drastically bifurcated market recovery seen to date.  It’s a topic that has had my interest for quite a while now.  More than just a ‘flight to quality’, start-ups and other users chasing top employee talent have swarmed to the downtown cores of Peninsula cities and had an immediate effect on rents in these locales.  A recent Article in the Registry summarizes some of the conventional wisdom on this split in the market, and some excellent points are made.  Clearly, San Francisco has become a magnet for hot tech companies to a level never seen before (the current migration is far more pronounced then that seen in the dot-com boom).   I do think that this is likely to remain a long-term trend.

I’m less convinced about any further divide between the most desirable Silicon Valley/Peninsula locations and the older core of the Valley.  There has always been a premium for space on the Peninsula over San Jose and its neighbors, and that is as evident in today’s market as ever.

But much of the rent growth driving the historic gap referenced in this article stems from the current white-hot demand for rail-served amenity rich locations.  Rent growth in, for example, Palo Alto’s downtown, accounts for a very substantial chunk of the total increase in that city.  Lease rates for multi-tenant space in downtown Sunnyvale are starting to track upwards, and I expect that downtown Redwood City (which is in a lot of ways a better draw for startups than the traditional Palo Alto and Mtn View hubs) will be the next to see explosive growth.   Rapid improvement to these traditionally sleepy submarkets tells me that what is driving the widening chasm between various parts of the Valley is not driven by the conventional geographic parameters.

I’m pretty confident that we’ll see a lessening rent gap down the road between north and south Silicon Valley– whether that comes from a softening in the top markets or a spillover effect into the 408 area code is an open question.

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