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No gamble with Dermody in Reno

Reno, Nev.-based Dermody Properties has leased 420,000 sq. ft. to locally based apparel manufacturer SanMar at Dermody's Patrick Business Park. SanMar previously had occupied 55,000 sq. ft. in a Dermody owned building in Sparks, Nev.

Not so down in Silicon Valley Back in the days when Hearst's yellow press ruled the San Francisco Bay area, someone like me might trumpet: "Industrial vacancy rates in Silicon Valley twice office rates!" Though it is true, office vacancy rates are 1%, and industrial vacancy rates are 2%. The market is such that what is generally referred to as industrial product and what actually lies in Silicon Valley's 267 million sq. ft. market are quite dissimilar.

"R&D in this area now has turned into all office," says Paul Lyles, an associate in CB Richard Ellis' Silicon Valley office. "It's not one-third office, one-third lab space with tile floor and one-third warehouse. It's 100% office."

Still, it's office by the fact that there are a bunch of programmers and engineers sitting in front of computers all day in these properties. The buildings are basically the same as typical flex properties. The aforementioned 1% office vacancy rate plays a big part in this trend, placing new users in once purely flex space and driving "traditional" industrial users to cheaper pastures in Gilroy and Morgan Hill to the south, Hayward to the north and Modesto and Stockton to the east.

Silicon Valley's land constraints combined with a continuous flood of venture capital (VC) - almost 24 months of consecutive increases in VC funding - keep the area's rents spiraling upward as well. "You've got to pay to play in Silicon Valley," says Jerry Inguagiato, a senior associate in CB Richard Ellis' Silicon Valley office.

"[Rents] have doubled in the past five months," says Inguagiato. "We're continuing to see record amounts of venture capital invested in the Valley. That money is going into expansion, which, in turn, goes into more real estate."

In the Valley and throughout the country, telecom users also have emerged, but they rely on two major factors, says Inguagiato.

"One is fiber, the other is power," says Inguagiato of the telecom recipe. "In terms of rehabbing industrial buildings, it can be done, but you have to have those two, key ingredients. There are situations in our market where that's happening, where a building that would have been 50 cents to 70 cents net per square foot per month, and is located by fiber and power, can be rehabbed and trade at $2 to $2.50 a foot."

In such a market, owners have grasped potential tenants firmly by their wallets. Equity in startups and 12- to 24-month security deposits on five-year terms are common.

"It's just key to entice landlords," says Inguagiato. "[Landlords] will have multiple offers and have a situation where they say, `For every square foot you lease, I want three shares of pre-IPO preferred stock warrants."

Although the tech stock gyrations of the spring and an up-and-down summer haven't had a real impact on Valley real estate - repeat after me: 2% vacancy, record VC money - they may have put a few worries in the back of landlords' minds.

"It seems to be chugging along just as hard as ever, but I think [the stock market instability] has caused some concern for a few landlords as far as how they analyze credit," says Lyles. "It's given them a little bit of a warning signal: What happens if it's more serious than a blip? What are they going to do if the market actually turns?"

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