Tearing Down in Silicon Valley

During the roaring ‘90s, John Sobrato could scarcely build offices fast enough in Silicon Valley.

These days, he’s tearing them down.

With office rents plunging, Sobrato’s family-run company -- the largest commercial property owner in Silicon Valley -- is razing buildings to make way for new apartments. His Sobrato Development Cos. also is looking beyond California’s tech hub, where it owns 11 million square feet of office space and 8,000 apartments.

Sobrato is buying property in Los Angeles and San Diego, and he’s looking in Portland, Ore. His closely held company has shifted a quarter of its assets into stocks, bonds and cash, he says.

He has cause to diversify. Since late 2000, office rents in Silicon Valley have plunged 63%. Sobrato says one of every 10 of his tenants has gone bankrupt. North of San Jose, office complexes appear empty, without even a single car in their vast parking lots.

Sobrato, 41, says he doubts the local office market will stabilize until the computer industry starts hiring again. He’s demolishing three of his office buildings. They represent 5% of his commercial holdings, or about 500,000 square feet of space.

Sobrato says he’ll build apartments in their place. He figures the switch makes sense because the occupancy rate for residential buildings in the valley is still 93% when the commercial rate has fallen to 75%. Average monthly office rents have fallen to about $2.46 per square foot from $6.70 in the fourth quarter of 2000, according to Commercial Property Services, a real estate broker in Santa Clara, Calif.

The bust could have been worse for Sobrato, whose family began investing in valley real estate in the 1950s.

When he built during the ‘90s boom, he often left it to tenants to install elevators, bathrooms and lights. When he built 400,000 square feet of office space for Exodus Communications Inc., for example, he made the company outfit the interior. When Exodus folded in September 2001, Sobrato got 7 cents on the dollar for one year’s rent -- and Exodus’ $32 million worth of improvements on his building.

Sobrato has seen busts before, and he says he’s confident Silicon Valley’s technology industries -- and its property market -- will revive eventually.

“Something will come along,” he said. “It always does.”