Driven by Silicon Valley’s seemingly endless high-technology engine, millions of square feet of commercial space were constructed in Silicon Valley in the 1970s and 1980s. Much of this space consisted of large, one or two-story industrial and R&D buildings, built as part of sprawling campuses for high tech manufacturers and fabricators. But over the past decade, a lot of manufacturing jobs have moved elsewhere, to lower-cost areas in Texas, Oregon, or Massachusetts—or overseas. This has left a glut of vacant industrial buildings with functionally obsolete space on the market, with few prospects to fill it up.
At the same time, the San Jose metropolitan area’s rapidly growing population continues to put tremendous strain on the area’s housing supply. Prices have increased month after month, year after year, to levels that some analysts worry are too high.
With a drastic oversupply of industrial space and undersupply of residential space, it didn’t take long to identify the answer: Silicon Valley real estate’s own version of “recycling”.
16 Million Square Feet of Conversions
According to local brokerage firm Commercial Property Services (CPS), nearly 16.4 million square feet of commercial space at 150 sites are at some stage in the process of being converted to residential offerings.
With less than 3.2 million square feet already converted, the vast majority of that space will be transformed into much needed housing over the next few years. Almost 6.5 million square feet of space is under contract in the entitlement phase. Another 1.9 million square feet should soon be added to that, once an issue or two has been resolved with city planning departments.
“This movement from industrial to housing promises to reshape the Valley’s landscape,” says Ralph Borelli, president and CEO of Borelli Investment Company. “The 16 million square feet of space represents more than one-quarter of the vacant industrial space in the Valley, according to some estimates. The shift will be good for commercial rents—firming the market a bit—and also good for housing, cooling off what has been an overheated marketplace.”
A number of big-name builders are active participants in the conversion of industrial to residential space. For example, Southern California-based Shea Homes plans to demolish the longtime Underwriter Labs R&D facility in Santa Clara, replacing it with high-density housing. Shea is also looking at other potential conversion sites, from Mountain View to San Jose.
A New Breed of Condominiums
Besides residential condominiums and townhomes, there’s another type of condominium that is rising out of the dust created as old industrial buildings are recycled: business condominiums. Developers such as Borelli Investment Company, which has been at the forefront of the business condominium trend in Northern California, are actively searching for undervalued industrial properties to purchase, renovate, and convert to office condominiums.
For example, Borelli’s Junction Office Center was originally a vacant R&D complex on Junction Avenue just off Brokaw Road in San Jose. Borelli Investment Company purchased the two two-story buildings in 2005, investing nearly $10 million, and converting the space into 52 office condominiums ranging in size from 750 to 3,000 square feet—for a total of 77,400 square feet. Smaller companies, including medical and dental practices, can purchase office space at Junction and enjoy all the advantages of ownership, from tax benefits to potential appreciation
“The owners of the industrial buildings get a fair price for what had been a non-income producing investment,” Borelli explains. “And once the renovation is complete, companies that never dreamed of owning business property can afford to buy—putting an end to ever-rising lease rates. Recycling industrial space to business condominiums benefits everyone involved.”
The Space Race
There’s still plenty of demand for quality commercial space in Silicon Valley, as recent deals such as Adobe’s purchase of the San Jose Water Works acreage for future development in downtown San Jose suggest. Also, at some point, if millions of square feet of industrial space are converted to residential, there’s a danger of reaching a saturation point in the housing market.
But for now, it’s a case of spring renewal of a different kind, as industrial buildings with functionally obsolete space make way for a fertile crop of much-needed housing and other uses in Silicon Valley.