A local investment firm is fine-tuning its bet on the San Francisco Bay Area office market's rebound by extending its recent acquisition streak to include a tech company's Silicon Valley headquarters.
FH One Investments, an increasingly familiar name across the regional real estate market, has scooped up a two-property office portfolio in San Jose, California, leased entirely to biometric technology company Synaptics. The deal, which closed earlier this month at $29.5 million, underscores the strengthening demand among buyers in the Silicon Valley office market, especially for single-tenant properties leased to stable tech companies.
Hopeful investors are betting prices will spike as the Silicon Valley market gains post-pandemic momentum.
"Our investment philosophy centers on acquiring unique assets when market conditions create attractive entry points," FH One President Daria Hosseinyoun said in a statement to CoStar News. "Given its long-term lease, we are able to take a long-term view and acquire an irreplaceable property at valuations that will prove compelling as the technology sector continues to evolve."
The price tag for the two buildings at 1109 and 1151 McKay Drive shakes out to about $293.50 per square foot, a healthy bump compared to what seller South Bay Development Co. paid in early 2022 when it acquired the properties from Synaptics as part of a larger portfolio deal.
The tech company sold five buildings totaling about 235,375 square feet as part of a leaseback agreement with South Bay Development. The $58 million deal — or less than $246.50 per square foot — meant Synaptics would remain headquartered in the two McKay Drive properties for an initial 12-year term with an option for a seven-year extension.
While it is no longer its own landlord, Synaptics is locked into the more than 100,500-square-foot space through at least 2034, according to terms of the sale-leaseback agreement, providing the stability and reliable rent roll investment firms such as FH One are prioritizing when it comes to honing their acquisition strategies.
Given its role as one of the most concentrated tech hubs in the world, Silicon Valley's office market has been especially hard hit by the industry's widespread downsizing and weakened demand in the aftermath of the pandemic. The region's vacancy rate of more than 16.5% is at its highest point in 20 years and is higher than the nation's vacancy rate of 14%, according to CoStar data.
Building demand
Sales of single-tenant, tech-leased properties have long played a significant role in helping to prop up Silicon Valley's investment activity. Tech tenants, including Apple, Alphabet's Google and Meta, provided a source of reliability and certainty for investors in an otherwise turbulent market, and properties with long-term leases in place have commanded some of the highest prices in the South Bay area.
However, the pandemic's lingering impacts, coupled with many tech companies' efforts to downsize their real estate portfolios, have meant some buyers have remained on the sidelines as they wait out any market uncertainties.
Leasing activity across the tech-concentrated region has fallen to lows comparable to the Great Recession. While the amount of sublease space has fallen, there is still more than 5.3 million square feet weighing down the market and further complicating any sense of a recovery.
Office deals across the Silicon Valley area remain depressed compared to their pre-pandemic levels of activity and pricing, but those lower valuations are opening the door for smaller investors or tenants who are eager to take advantage of the discounted opportunities.
LinkedIn last month closed a $74 million deal to purchase a 120,000-square-foot property in nearby Sunnyvale, cementing its presence in the tech-concentrated hub and lending a boost of optimism that some big tech companies are gradually reverting back to office expansions after years of severe real estate cuts.
Global chipmaker Nvidia has also been scooping up large blocks of space across the San Francisco Bay Area, most recently with its $123 million purchase of 2348 and 2350 Walsh Ave., an office park just down the street from the MDY listing.
For FH One, its San Jose purchase closed within weeks of its heavily discounted deal for Sutter Square, an office building across the Bay Bridge in Concord, California, for which the firm paid just $13 million to acquire.
The Silicon Valley "acquisition, along with our recent Concord purchase, reflects our belief that now is the optimal time to secure premium assets that will benefit from the inevitable market recovery," Hosseinyoun said. "We're building a portfolio of irreplaceable properties that technology companies will always need."