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By Dan Levy Jan. 5 (Bloomberg) — Silicon Valley is beset by the biggest office property glut since the dot-com bust, leaving the U.S. technology hub with empty high-rises and office parks that make it impossible for landlords to sustain average rents. More than 43 million square feet (4 million square meters) — the equivalent of 15 Empire State Buildings — stood vacant at the end of the third quarter, the most in almost five years, according to CB Richard Ellis Group Inc. San Jose, Sunnyvale and Palo Alto have 11 empty office buildings with about 3 million square feet of the best quality space. “There is a bubble bursting in much the same way as the residential market burst,” said Jon Haveman, principal at Beacon Economics, a consulting firm in San Rafael, California. “None of those towers will fill up anytime soon.” Unemployment in the San Jose-Sunnyvale-Santa Clara metro area that includes Silicon Valley was 11.8 percent in November, down from the August record of 12.1 percent, according to California’s Employment Development Department. Applied Materials Inc. and Sun Microsystems Inc. in Santa Clara and Adobe Systems Inc. in San Jose announced more than 5,000 job cuts since October amid falling sales of computer chips, software and equipment. Commercial property foreclosures will at least double in 2010 and job growth won’t return for two years after that, held back by U.S. consumers who are saving more and “getting back in line with sustainable spending habits,” Haveman said. Domino Effect Bloated inventory and tight lending standards will curtail office construction in pockets around California for “the next several years,” said Jack Kyser, founding economist of the Kyser Center for Economic Research at the Los Angeles Economic Development Corp. “That means there won’t be jobs for construction workers and hence no tax revenue from sales of construction materials,” Kyser said. “It is the ultimate domino effect.” About 21 percent of Silicon Valley’s Class A office space is vacant, as is 20 percent of low-rise so-called flex or research and development space for offices or manufacturing, CB Richard Ellis said. More than 4 million square feet of speculative office projects opened since 2007 as developers anticipated that companies would move from flex space into new towers, according to CB Richard Ellis. Empty Class A offices totaled 13 million square feet and vacant flex space was 30.5 million square feet as of Oct. 1, the Los Angeles-based broker said. “Many of these assets have lost half their value,” said Dan Fasulo, managing director of New York-based research firm Real Capital Analytics Inc. “That’s a bloodbath.” Start of Shakeout Silicon Valley is in the “early innings” of a commercial property shakeout, said Erik Doyle, president of Cornish & Carey Commercial, a property brokerage in Santa Clara. The number of jobs in the information-technology sector that includes software and Web portals fell more in the prior year than in any industry except construction and mining, state data show. Some technology companies are taking the opportunity to upgrade their space. Palo Alto-based Facebook Inc., the most popular social-networking Web site, signed a 135,000-square-foot office lease and a 265,000-square-foot flex lease. Solar-panel maker Solyndra Inc., which filed Dec. 18 for a $300 million initial public stock offering, broke ground on a new plant in Fremont in September. Tenant Pressure Property owners are feeling pressure from tenants who want to lease for at least 10 percent less than published rates, said Michael Grado, a CB Richard Ellis broker. That makes this market worse than the dot-com bust after 2000 because back then defunct Internet companies continued paying rent despite a 60 percent vacancy rate, he said. Asking rents averaged $34.56 a square foot for Class A space in the third quarter, 21 percent less than a year earlier. The rate for flex space was $14.16 a square foot, down 16 percent, according to CB Richard Ellis. “You’ll see buildings turn over,” said Grado, whose listings include Riverpark Tower II, a 318,372-square-foot empty high-rise completed in July and owned by Foster City-based Legacy Partners Commercial Inc. Riverpark II is the second-largest 100 percent vacant Class A office property in Silicon Valley. Oracle Corp. ’s 381,000-square-foot tower at 488 Almaden Boulevard is the biggest, acquired in the 2008 takeover of BEA Systems Inc. Both properties are in downtown San Jose. Moffett Towers, a complex in Sunnyvale with 1.6 million square feet, has partially leased only one of its six buildings. Owner and developer Jay Paul Co., based in San Francisco, completed them in 2008. Cyclical ‘Churn’ Legacy is showing the building to prospective tenants, said Lisa Morrissey, vice president of marketing. Deborah Hellinger, an Oracle spokeswoman, and Matt Lituchy, a senior vice president at Jay Paul Co., didn’t return telephone messages seeking comment. Silicon Valley may need new industries to emerge from the property slump, according to Doug Henton, director of Collaborative Economics Inc. in Mountain View, California. Clean technology and social-networking are driving what little job growth exists amid a cyclical “churn” where layoffs at large companies lead to new jobs at start-ups, he said. “We’re at the end of the bubble,” said Steve Levy, director of the Center for the Continuing Study of the California Economy in Palo Alto. “It will take a long time to get the momentum going.” To contact the reporter on this story: Dan Levy in San Francisco at dlevy13@bloomberg.net .

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Silicon Valley’s Worst Office Glut in 5 Years Means Real-Estate Bloodbath