SAN JOSE — Widening woes in the tech sector such as job cuts have hobbled efforts to land a big tenant for a brand-new San Jose office building next to Santana Row, real estate executives said Thursday.
Despite the current short-term lease challenges for the One Santana West complex, the long-term prospects remain bright for the big new office building, executives with Federal Realty Investment Trust, the principal owner and developer of Santana Row and the adjacent office project, told Wall Street analysts Thursday.
Problems on multiple fronts for the tech sector have coalesced to impede demand for One Santana West, which has sprouted across the street from Santana Row, Donald Wood, chief executive officer for Federal Realty, said during the conference call.
“There is no question that the cooling of the technology sector in the last 90 days both in terms of their stock prices and getting employees back into the office has been a wet blanket on what had been strong leasing momentum” for Santana West, Wood told analysts.
The office building totals 375,000 square feet and is located along Winchester Boulevard.
“This has been disappointing, yes,” Wood said of the lack of completed deals for Santana West.
Still, the developer and its leasing agents for the project, a term of brokers from Newmark, a commercial real estate firm, are pulling out the stops to get the project filled up, Jeff Berkes, chief operating officer with Federal Realty, told the analysts.
“We are not taking a pause on leasing” Santana West, Berkes said. “We are out there working as hard as we can to lease the building as quickly as we can.”
The tech sector simply isn’t certain yet how much office space it will really require to operate in the Bay Area.
“Companies are still struggling and trying to figure out a way to get people back to work,” Berkes said.
Federal Realty also sought to draw a distinction between the respective states of the commercial real estate markets in San Francisco and Santa Clara County.
“There is a big difference between the two,” Berkes said. “A lot of people read headlines or watch news about things that are happening in San Francisco and attribute that to the whole Bay Area. That is not accurate.”
The office market in San Francisco at present is reeling from layoffs, rising vacancies, subleases and corporate exits punctuated by reports of crimes such as the robbing at gunpoint of Prologis Chief Executive Officer Hamid Moghadam in the tony district of Pacific Heights.
“San Francisco is still struggling mightily through some social issues that are making a return to the office and office leasing very difficult,” Berkes said.
Even if Silicon Valley is largely free of the social problems that haunt San Francisco, plenty of potholes appear likely to imperil the office sector in Santa Clara County for the next several months.
“It’s going to be choppy for a few quarters” in Silicon Valley, Berkes said. “We’re going to see more sublease space come to market. Companies are really struggling to figure out how to get their employees back to work. We are going to see some downsizing.”
After the outbreak of the coronavirus and subsequent business shutdowns to combat the spread of the deadly bug, numerous office buildings emptied out. With the coronavirus-linked shutdowns now ended, tech companies have charted an uneven return to the office.
One Santana West and its brokers might be able to capitalize on the downsizing, Federal Realty executives said.
“Perversely, that might work out to our advantage at Santana Row,” Berkes said. “You remember NetApp took 700 Santana Row and downsized out of several buildings that were not state-of-the-art and were not fully amenitized.”
In that 2021 deal, NetApp exited 700,000 square feet in several Sunnyvale buildings that the tech company sold to a real estate firm and through a property sale and simultaneously leased 301,000 square feet in a single building at Santana Row. Now, the company’s headquarters are in San Jose.
“There are other tenants in the market right now that are thinking of doing the same thing,” Berkes said.
Despite the short-term difficulties, the future is bright for the eye-catching Santana West office building, Federal Realty officials insisted.
“To put this in perspective,” Wood said during the conference call, One Santana West is “a brand-new, state-of-the-art office building next to one of the most successful, amenity-rich destinations in the tech capital of the country.”
