Back when San Jose and its surrounding territory was known more as a sleepy backwater to San Francisco than as the economic powerhouse that is Silicon Valley, who would have thought its commercial real estate market would get so bad?
But this Tuesday, a Los Altos-based software company is being forced by the tight market to rough it -- eight of its now-nomadic systems-support geeks will be camping out at a nearby, vacated dry cleaner's with cell phones, wireless modems, and card tables.
The company, Interwoven, has outgrown its current lodgings but cannot move into its bigger offices in Sunnyvale until its lease begins at the end of May.
Moving into a dry cleaner's sounds like a PR stunt, but the drama is for real, according to Silicon Valley-area real estate experts. Blame it on the booming digital economy.
Bhez Woodworth, analyst with the San Jose office of economic development, cited a recent Price Waterhouse study. "In all of 1997, venture capitalists invested US$3.66 billion into 699 companies in Silicon Valley," a 62 percent increase from 1996. That's a large and ever-growing number of startups vying for space to grow as exponentially as they dream.
The valley is now a landlord's dream market, and prices have increased accordingly. In highly desirable areas like Cupertino and Mountain View, office space rents at $3 per square foot. Even in the Silicon Valley area as a whole, the average per square foot is $2.46, up 40 percent from a year ago.
According to research by Santa Clara-based Cornish & Carey Real Estate, the commercial vacancy rate has plummeted from about 23 percent in 1990 to 4.4 percent in 1997, the lowest rate in a decade.
Martin Brauns, Interwoven's president and CEO, is surprised at how quickly his company's growth has meant that it had to confront the serious lack of space. In September, to deal with overcrowding, the company moved its sales team down the road about 300 yards. But the growth continued.
"When we started making this decision, we had about 28 employees. Now we have about 45, soon to be 50," Brauns said.
Though the company jokes about how cheap its rent is for the moment, a drycleaner's is hardly a dream office.
"It's a dump," said Rich Petersen, marketing manager. "It's a rundown building from the '40s."
Petersen noted that because of the building's big glass window and door, security is so bad that the company's employees can't leave their belongings there overnight.
The lack of security, plus an expected long wait for T1 installation and rewiring was the final straw that prompted the company to rely on laptops and wireless gear.
"Our customers don't know the difference. Aside from electricity, that's all you need," said Petersen.
Realtors agree that space in the Valley is tight.
"Since about 1995, we've really dealt in future space, because there isn't any currently available. We have local knowledge of who might be moving," said Bob McComb, the Starboard Commercial Real Estate agent who found Interwoven's new offices in Sunnyvale. McComb saw the site the night before it was made available to the public, called Interwoven, and had them check it out early the next morning. They snagged it right then.
The requirements for a lease have gone up as well, said Mark Ritchie, owner and president of Ritchie Commercial, a San Jose-based real estate company. "The credit demands are much more strenuous, particularly for high-tech firms with not a long history. These stronger demands tie up some of these firms' capital," he said.
This makes it especially hard for the little startups.
"Landlords can be more selective, and if Interwoven is competing with a Sun Microsystems, there has to be a really compelling reason for the landlord to want to lease to Interwoven," said Matt Marshall, of the Staubach Co., a real estate consulting firm in Palo Alto.
"We know why they are called 'lords.' They are not land-serfs," said Ritchie. "There's a lot of twirling of waxed mustaches in Silicon Valley right now."
The corollary to this office crunch is an affordable-housing crisis. In 1996, Cornish & Carey research shows that about two out of five Silicon Valley households could afford median-priced homes, compared to three of five households nationwide.
Why then do companies still believe it's worth such travails to stay in the valley? Interwoven spokespeople cited proximity of business partners and startup peers as primary reasons for staying in the 'hood.
Even for a big company like Intel, headquartered in Santa Clara, these concerns are pre-eminent.
"It's very important to be in and around other technology companies," said Bill Calder, Intel spokesman. "You will always have that synergy from tech companies and from universities: the new graduates, the very bright people going into the mix. We will always have some degree of operation there." Calder acknowledged that Intel's Silicon Valley employees have an "adjusted salary" to accommodate the higher cost of living.
