Downtown Palo Alto office market climbing the Hill?

| September 23, 2011 | 2 Comments

A recent study from another brokerage has received a good deal of attention around the local market.   JLL’s rating of the most expensive streets in North America, as one would expect, includes a hearty dose of Bay Area addresses.  Top of the list, to the surprise of none, is Menlo Park’s Sand Hill Road.  Sand Hill has long been known as one of the most elite office addresses anywhere, driven by its historic appeal for local venture firms.

There may be a power shift in the battle of the pricey addresses.  Equally unsurprising, coming in at #4 on the list is Palo Alto’s University Avenue.  Despite some odd assertions in one article associated with this report, downtown Palo Alto has long history of substantially outperforming surrounding markets and has always appealed to young companies (I was leasing space to startups there long before the dot-com days).  Even given its track record, this is a submarket on the rise, and many think it could find itself surpassing Sand Hill as the Bay Area’s toniest address soon.  My colleague and fellow Cal Bear David Gray points out that recent lease comparables in downtown Palo Alto have checked in at $95/sf annual rents, while Sand Hill deals have been at a paltry $93.  More telling might be the current 10% vacancy rate on Sand Hill, compared to roughly 2.5% in downtown Palo Alto.  Additionally, Sand Hill’s traditional VC population has, to a degree, migrated downtown over the past decade or so.  And why wouldn’t it?  Despite a very pleasant work environment, Sand Hill Road is lacking in the sort of amenities found in abundance on University Ave.

This study is an interesting read (though I’d love to know more about the methodology– seems that Mtn. View’s Castro Street should be ranked somewhere in the mid-teens).   Downtown Palo Alto’s relative standing on this list is relevant beyond bragging rights.  It’s a great snapshot of what I’m certain is a permanent long-term trend in suburban markets, favoring a pseudo-urban CBD environment with higher densities and access to amenities and quality public transportation.

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