Bright spot for Santa Clara office market as Applied Materials subleases 246K sf from HPE

Applied Materials has subleased 246,000 square feet of additional space in Santa Clara, a deal that strengthens its presence in its home city while offering some good news for its struggling office market.

Applied agreed to sublease an entire six-story office building at 3333 Scott Boulevard from a unit of Hewlett Packard Enterprise (HPE), two brokers with knowledge of the transaction who requested anonymity told The Real Deal. The sublease adds to the dozen buildings in Santa Clara and the nine in neighboring Sunnyvale that Applied owns or rents — a collection of properties that spans three campuses.

The Class A building on Scott Boulevard is next door to one it’s subleasing from Palo Alto Networks, another local tech company, and within walking distance of its 673,500-square-foot “Bowers” campus, one of Silicon Valley’s larger office complexes.

Applied Materials, one of the world’s largest suppliers of manufacturing equipment for semiconductors — often called computer chips — subleased 3333 Scott Boulevard last month, one of the brokers with knowledge of the deal said. Applied didn’t respond to requests for comment. HPE spokesperson Adam Bauer said the company put the entire building on the market for sublease last summer but declined further comment.

Brokers for Cushman & Wakefield, which represented both Applied and HPE, either declined or didn’t respond to requests for comment.

Demand for semiconductors has never been stronger, Applied CEO Gary Dickerson said during a February earnings call, prompting the company to take a “lease some, buy some” approach to real estate over the last year. It acquired three Sunnyvale research buildings totaling about 200,000 square feet for $81 million in May 2021 before leasing a 210,000-square-foot industrial facility in Fremont in the East Bay a month later.

Since then, Applied’s business has continued to boom: It reported a record-high $6.3 billion in revenue last quarter, up 21 percent from the previous year, despite dealing with sector-wide supply chain constraints.

Its latest expansion is the largest sublease by square footage in Santa Clara’s office market in five years and its third-largest lease of any kind during that time, according to Colliers data. It’s a welcome bit of news for a city with an almost 30 percent office vacancy rate, the highest out of 17 Silicon Valley submarkets, according to Cushman data. More than 2.1 million square feet of offices were vacant in Santa Clara at the end of last quarter, an 88 percent increase from two years ago, Cushman data show.

Signs of optimism remain: Amazon expanded its office presence in the city by 160,000 square feet last quarter, agreeing to rent an entire six-story building after taking a third of it last year. The expansion was the largest new office lease signed in Silicon Valley during that time.

HPE, meantime, has found a taker for a building it didn’t need after the tech company said it was moving its headquarters to Texas from San Jose in December 2020. The property was formerly occupied by its wireless networking unit, Aruba, which relocated its employees and operations to HPE’s 220,000-square-foot office in North San Jose last summer, Bauer said.

Aruba signed two leases in 2015 to occupy five of the six floors at 3333 Scott Boulevard and one floor in an adjacent building at 3315 Scott Boulevard. They took effect in March 2017 and run for 11 years, according to an SEC filing detailing them. Before putting 3333 Scott Boulevard up for sublease, the company agreed to occupy the entire property while keeping its ground-floor space at 3315 Scott Boulevard. Aruba has no intention to make that floor available for sublease, a broker with knowledge of its plans who requested anonymity told The Real Deal.

While it’s unclear how much Applied is paying to rent 3333 Scott Boulevard from the HPE unit, the latter paid about $2.90 a square foot a month in base rent at the start of its term, the Silicon Valley Business Journal reported in 2015. Average Class A asking rents in Santa Clara were $4.71 a square foot a month at the end of last quarter, Cushman data show.

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