IE 11 is not supported. For an optimal experience visit our site on another browser.

India vs. Silicon Valley in real estate rivalry

/ Source: San Jose Business Journal

A new academic study and word from brokers on the street confirm what some have mostly just feared: The English-speaking, educated Indian subcontinent is becoming a direct competitor to Silicon Valley commercial real estate.

Executives at the Northern California offices of The Staubach Co., a U.S. real estate tenant representative, in concert with British partner DTZ Debenham Tie Leung, say they are responding to strong client interest in India. "We are not trying to push it," says Tony Lautmann, Northern California president for Staubach. "We've really been reacting to our clients' needs. Let's be clear: It's a reality, and it's going to happen."

Representatives for valley tech firms Cisco Systems Inc., Adaptec Inc., KLA-Tencor Corp. and PeopleSoft Inc. recently attended a morning Staubach meeting on India outsourcing at Cadence Design Systems' San Jose campus. In the last week alone, at least four Silicon Valley firms have met with DTZ's Indian operations manager Ankur Srivastava to discuss their plans in India, he says, speaking from London.
"And I am only one player in the market," he says.

Silicon Valley behemoth Intel Corp. is purchasing 43 acres in Bangalore for a new company campus that could be as large as 1 million square feet, Mr. Srivastava says. Hewlett-Packard is considering a lease for a 400,000-square-foot campus, also in Bangalore, on top of existing commitments.

Silicon Valley firms such as Oracle Corp., Agilent Technologies Inc. and Cisco already are well-ensconced in India. Agilent is growing. The company employs 800 people full-time and contractually just outside Delhi, says Anita Manwani, a vice president in charge of India operations. The company expects the number to grow to 1,000 by next year. Agilent is using Indian labor to provide financial and engineering services to Agilent worldwide, she says.

A customer service manager for Cisco says the company's experience outsourcing order management services in India has been excellent. Cisco is the valley's largest private employer with 13,000 employees, down from 16,000 in 2001, according to the Business Journal's Books of Lists.

"We've seen benefits come back to us pretty significantly," says Rick Towner, business manager for global operations support for Cisco

Vulnerable to outsourcing
A new study from the well-respected UC Berkeley Fisher Center for Real Estate and Urban Economics finds that San Jose's employment profile, including its notoriously fat payrolls, makes it vulnerable to the wave of outsourcing to India.

Most at risk in San Jose are occupations that the U.S. Bureau of Labor Statistics defines as "computer and math related" such as programmers, software engineers, database administrators, network administrators, and operations research analysts, says an author of the study, Ashok Bardhan.
San Jose has "almost four times the average share of computer and math jobs (relative to its total share of U.S. employment)," the study says.

Under a worst-case scenario where the region's reputation for innovation fails, outsourcing would depress regional office rents and occupancy rates in the longer term, putting them on less-ambitious trajectories than otherwise would be the case, the study found.

San Francisco also is at risk for the same phenomena as are other high-tech centers like Boston. In fact, the outsourcing movement could depress the California office market as a whole.
Office and research and development buildings in Santa Clara County already are about a quarter vacant, one of the worst if not the worst state of such affairs ever in the valley.

Expectations remain high overseas
This year alone, Indian cities are expected to see as much as 10 million square feet of gross absorption of commercial real estate. That's on top of about 7 million in 2002 and about 5.5 million square feet in 2001, DTZ's Mr. Srivastava says. Annual rents are in the neighborhood of $19 a square foot a year.

That compares to current full-service rental rates of about $25 a square foot a year in Silicon Valley and just over $30 a square foot a year in San Francisco, according to Cushman & Wakefield.
Still, India is not the solution to every ill that ails American enterprise. In Bangalore, for instance, commercial space is tight and difficult to get. Land costs are rising, and rental rates almost certainly will follow, brokers and consultants say.

Fear of nuclear war in the country's north, where India borders Pakistan, has likely limited outsourcing operations there.

India is not recognized as a strong manufacturing center, either. The honor goes to China, at least for now.
Offshoring does not mean Armageddon for Silicon Valley, either. Though the American press has devoted a lot of discussion to U.S. job losses linked to outsourcing, Agilent's Ms. Manwani and others argue that it is good and probably necessary in the longer term.

"It allows us to move to different levels of innovation with engineers here [in the United States] focusing on design, development and new-product innovation," she says. "It also makes our companies more competitive and lets us return more shareholder value."

The Fisher Center study says Silicon Valley real estate escapes the worst-case scenario if the region's history of innovation continues, producing new, high-paying jobs and occupations to replace those lost. Growing wages, incomes and company profits push up occupancy and rents.

Still, it's obvious that commercial real estate professionals in Silicon Valley are thinking about offshoring's implications. In the last three months alone, the legendary Sam Zell of Equity Office Properties Trust, the valley's largest commercial property owner; Carl Berg of Cupertino's Mission West Properties, which owns nearly 8 million square feet in Silicon Valley; and Ned Spieker of the former Spieker Properties of Silicon Valley all have made public remarks about Indian outsourcing.

"It does exacerbate the downturn. It's not just the ebb and flow of new technologies at work now in Silicon Valley. Now you have exogenous forces pushing themselves on the market," says Christopher Hartung, an analyst for WR Hambrecht & Co. in San Francisco who tracks the performance of real estate investment trusts like Mission West.

"The state already has business cost issues, state budget issues. This is just one more thing on the list, and it's not a great time for it to occur."
Copyright 2003 American City Business Journals Inc.