Elsewhere: Silicon Valley Bounces Back From Tech Wreck

Last month, Internet giant Yahoo Inc. paid TMG Partners more than $100 million for more than 40 acres containing older office buildings in Santa Clara, Calif., according to Michael Covarrubias, chief executive of TMG, a San Francisco-based developer. Google Inc. has paid about $319 million for nearly one million square feet of office space in Mountain View, including its existing headquarters. Meanwhile, Apple Computer Inc. in April said it assembled nine properties in its hometown of Cupertino that it plans to transform into a 50-acre campus to accommodate its growth.

The moves are a victory for the embattled economy of the largely suburban San Jose, Calif., region that extends south of the San Francisco Bay and is considered the global capital of the high-tech world. They also reflect the moderate economic expansion that has finally returned to this region, says Kenneth T. Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

The new growth is fueled by Internet and media-related tech companies that are offsetting the loss of computer manufacturing jobs, Mr. Rosen says. Still, the recovery isn't complete. In July, employment, though showing solid net increases since 2005, was still about 184,000 jobs below the peak July level hit in 2000, according to the Bureau of Labor Statistics.

The health of the office submarkets varies widely. San Jose's central business district is still chipping away at a vacancy rate that is near 29%, though rents are rising, says Property & Portfolio Research Inc., a Boston-based research firm. Meanwhile, the Palo Alto submarket -- which includes the famed Sand Hill Road, packed with venture-capital firms -- has seen vacancy rates drop to 16.3% in the second quarter, though rising average rents in the mid-$30 per square foot range are still well below the $81.33 of five years earlier.

The recovery also faces some challenges. A drop in office and warehouse vacancies has been aided by conversions to condominiums, but that could slow as the housing market cools. New space built by the expanding tech giants could potentially leave other leased buildings empty. "The return of the large corporate players is without a doubt good for the economy, good for jobs and good for the region, but it doesn't necessarily help the oversupply," says Drew Arvay, a managing partner with NAI BT Commercial, a real-estate services company based in San Jose.

Others question whether the higher prices being paid again for properties in the San Jose region can be supported by rents. The average price paid per square foot was $215 for this year through June 29, a number pulled down by some older properties sold that wouldn't even have been considered for sale during the downturn, according to Dan Fasulo, director of market analysis for New York-based Real Capital Analytics Inc. But some properties have fetched prices in the $300 to $600 per square foot range -- well above the national average of $224 through late June. George Fox, executive vice president and branch manager based in Palo Alto for Studley Inc., a real-estate services company that specializes in tenant representation, believes buyers are incorrectly betting that rents will rise 10% a year; he says 3% to 5% increases are more likely.

Landlords say their time is coming. In 2003, Sobrato Development Cos. completed a 17-story, 380,000-square-foot office building at 488 Almaden Blvd. in downtown San Jose. The glass, stainless steel and Italian granite tower is still empty. John A. Sobrato, chairman of the development company, says he's had interest from multitenant users but has been holding out for a single large tenant because he believes they lower operating costs. He has seen a rise in interest recently and predicts the space will be filled within the next four months.