Cupertino's Commercial Real Estate Market is Strong

Cornish & Carey Commercial Newmark Knight Frank, a privately held commercial real estate brokerage, hosted the 2011 Silicon Valley Real Estate Review and Forecast conference at the Santa Clara Convention Center on Jan. 25.

Cupertino Patch sat down with Phil Mahoney, executive vice president of the firm, and asked him his thoughts on the real estate market in Cupertino.

Cupertino Patch: Overall, in your opinion, how are things looking in Silicon Valley?

Phil Mahoney: 2010 was the beginning of a snapback year as far as the valley’s concerned. And in the valley, San Francisco (is) really leading that snapback in employment and in job growth, which leads to our world—real estate.

Rent (is) starting to climb again, vacancies (are) falling again, (and) we haven’t seen (that) since 2007.

Patch: Is the same true for the South Bay?

Mahoney: It is, although it is still micro-market driven. Palo Alto: white hot market, 2 percent vacancy, rents going up monthly. Milpitas: not so much. So it really depends where you are.

Patch: How about Cupertino?

Mahoney: Cupertino: tremendous absorption. We lease over 400,000 feet to Apple; (the market is) pretty much driven by Apple. And also by Amazon—Amazon leased about 150,000 feet toward the end of last year. They bought a company called Lab 126; that’s their group there. So they’ve grown dramatically.

Also Apple absorbed the HP Cupertino campus, which is about 1.3 million feet, and paid a hefty number, over $300 million for the site. They’ve made a commitment there that they can build 3-5 million square feet. So Apple sees themselves in Cupertino for a long time to come with literally millions of feet and tens of thousands of new employees yet to come over the next decade.

So Cupertino is really sort of a poster child of the Silicon Valley recovery, manifested in real estate. And it’s getting pretty full, so there’s not going to be, I think, nearly the activity in Cupertino going forward that there’s been (in the past), because there just isn’t the supply.

Patch: So, you think it’s just going to stabilize?

Mahoney: Yes. Stabilize off as far as rents are concerned. The neighboring markets of the west valley, be it Campbell to the south or west San Jose; be it Palo Alto to the north, which is already pretty full. They will feel some of what would have gone to Cupertino.

As will Sunnyvale. (It) not only has, but is, absorbing companies growing there that may have gone to Cupertino in the past but simply don’t have the space to do it. So, the obvious question, "Why don’t they build more in Cupertino?"

Cupertino has a very myopic, very narrow view in their governance. The council, and you can quote me, their council is almost backward as they look at the future. If I sound harsh, I should be; I’ve owned property there.

They listen to the whim of the minority that will show up at a council meeting, without truly surveying the majority—and also caring not about their region.

They have a serious jobs-housing imbalance in Cupertino, and it’s about to get extraordinarily out of whack with what Apple’s going to do, and yet obvious sites that could be redeveloped for high-density housing, they listen to the fear mongers (who) say, "Oh Condo-tino. We don’t’ want Cupertino to become Condo-tino, and what are we going to do with our schools?"

When they won’t look at the hard facts. Where they won’t understand that when you’re in starter homes that are condos or townhouses, it’s usually "dinks," dual-income (no kids) people, that would support their retail.

Then (Cupertino) bemoan(s) the fact they don’t have enough retail dollars. Well, they shoot themselves in the foot.

So I’ve been as unimpressed with Cupertino as I have been impressed with places like Sunnyvale and Santa Clara and even San Jose under Mayor (Chuck) Reed that really are very forward looking.

You know, (they think) "How do we help businesses grow? How do we balance our jobs and housing?"

Cupertino is on ABAG’s (Association of Bay Area Governments) hit list for their lack of forward thinking as it relates to housing. You know, "Not in our backyard." It’s a din of NIMBYism.

Patch: How does the housing market look?

Mahoney: The housing markets are recovering. We’re starting to se—again in north San Jose, and again we’re getting a little forward thinking—they’re starting to build some high-density housing, which is needed.

Which again is so angering about Cupertino—"Oh we want low-rise," (they say.)

You’re an infill city; you are what you are. If you want your hills to remain green, then when you have an infill site, you need to have density where it should be.

Smart growth, not just growth for the sake of it, not sprawl, but along transit lines, along rail lines, along, for instance, the Stevens Creek (Boulevard) area where you have transportation, where you have services.

And we’re seeing that in San Jose, along the First Street corridor where about 4,000 housing units will be under development here shortly or are already in the process—it’s desperately needed. We need to get housing there, because we can’t, without a housing stock that’s growing, we can’t afford, or I should say, our housing affordability impacts our ability to get new engineers into our area, which chokes off our lifeblood.

Patch: What do you mean by that?

Mahoney: We’re in a whole different world than Detroit was even when they were on top of the world, because they were more automobile-centric, where we have so many different industries.

But we can kill our own goose petty quickly, and city councils like Cupertino would do well to do nothing rather than do something wrong, which they have perpetually done.

As opposed to some forward-thinking (cities) like Sunnyvale with their Town Center downtown, it’s old, blighted. Now, it’s had some problems. It came online at the worst possible time, 2007. You know, that happens.

Real estate is a tough business, and those that get it right are very wealthy, and they’re rewarded very well. But just as many go broke because (of) their timing.

It wasn’t that they were any less smart; maybe they were a little less lucky.

Those that were developing in 2000 didn’t see 9/11; who did? Right? There are events beyond your control, and in the last downturn, real estate obviously became much more of it than in the dot-com era, where it was dot-coms (that) were much more of the downturn.

Patch: Cupertino doesn’t have light rail, and Caltrain’s closest station is in San Jose; does the lack of mass transit hurt Cupertino in terms of real estate?

Mahoney: Absolutely.

Patch: In terms of home ownership and business?

Mahoney: Across the board. Transportation, congestion, the pollution you’re breathing on the streets of Cupertino, and, again, never looking at anything that could have gone down the (Interstate Highway 280) corridor—now they’re not alone on that.

There was a time that having a rail down the 280 corridor, the median, could have made some sense—but it takes commitment, it takes money.

We kind of get the government we ask for because we all want our programs, but we don’t want to pay for it. I think Cupertino is a perfect example of that.

I’ve been to so many council meetings there and I’ve walked away shaking my head in disgust at how they are swayed by a very vocal, but very small minority. And they have what they have, and they have it better than most, right?

Patch: Do you think the structure of the city council being a part-time city council has any influence on that?

PM: I don’t really know what it is. I’ve scratched my head on that, because Sunnyvale’s part time. They’re one of the best-run cities in Northern California, if not the nation. They’ve known how to balance business from the start, and they had some very rocky starts in the '70s and '80s with an incredible amount of pollution. Which they didn’t know, I mean nobody knew, what the semiconductors did to many of our aquifers.

But that’s being cleaned up. It didn’t stop them from saying, ‘Oh we won’t grow again,’ or ‘We won’t have a balance between where we can have high density.’

I mean they have a number of trailer parks in Sunnyvale, which are low income. (Cupertino) says, "Oh, we don’t want that here."

Well, who’s going to wash your car, who’s going to work here? You need that in the fabric of society.