Apartments replacing offices in areas hit by tech slump

By Anthony Effinger
Bloomberg News Service

SAN FRANCISCO — 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 the area — is razing buildings to make way for new apartments. His Sobrato Development Co. is also looking beyond California's tech hub, where it owns 11 million square feet of office space and 8,000 apartments.

Sobrato, 41, 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 percent. Sobrato says one of every 10 of his tenants has gone bankrupt. North of San Jose, entire office complexes appear empty, without even a single car in their vast parking lots.

Sobrato says he doubts the local office market will stabilize until the computer industry starts hiring again. With that in mind, he's demolishing three of his office buildings. They represent 5 percent 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 percent, while the commercial rate has fallen to 75 percent. 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.

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 says. "It always does."