The Bay Area Real Estate Journal
Carl Berg Casts Eyes on Oregon for Next Big Investment
Submitted October 19, 2009
Cupertino’s Mission West Properties Inc. is exploring a foray into the data center development business on two Oregon locations, its chief executive said.
Berg is chief executive officer of Mission West.
Data centers house the computer servers and other electronic equipment that companies rely on to operate their Web sites and to manage internal, Web-based communications and business functions. A main operating cost for data centers is the cost of electricity.
“As a result of cloud computing, we believe the demand for Web hosting will increase dramatically in the next two to three years,” Berg said. “We would only lease long-term” to “major companies in the U.S.”
The deal was initiated three months ago by a former tenant who is an expert on Web hosting, Berg said. He did not identify the tenant.
Web hosts provide their customers space on a server that the hosts own or lease, typically in a data center. The hosts also provide Internet connectivity.
The goal would be to build 400,000 square feet on the two locations. Every 200,000 square feet costs around $200 million, Berg said. Potential returns on invested capital could be as high as 12 percent. He has already begun to search for tenants, Berg said.
Mission West is one of the largest commercial property landlords in Silicon Valley. The company owns 111 locations with more than eight million square feet, nearly all of it in the South Bay. Nearly 850,000 square feet in Milpitas are in the process of being rezoned for residential development.
At quarter’s end, Mission West’s holdings were slightly more than 65 percent occupied. Among the company’s more important tenants are Apple Inc., which occupies numerous properties in Cupertino, and Microsoft Corp., which occupies a campus in the Shoreline area of Mountain View.
Mission West reported rental income of $20.4 million in the quarter, up slightly from the same three months in 2008. But Berg described leasing conditions and the economic climate in the valley as grim and unlikely to improve any time soon.
Berg was one of the most vocal naysayers during the commercial real estate boom. He refused to participate in the buying frenzy that hit the valley in the middle of the decade. To justify their prices, Berg told Wall Street analysts in early 2006, Silicon Valley buyers would have to see "substantial" increases in rents in the next several years.
If they don't, "you have a whole bunch of idiots who are really going to lose a lot of money,” he said.
An argument could be made that his observations were spot on.
He predicted both disaster and “huge opportunity” for well-positioned investors in Silicon Valley over the next two years, though landlord distress will not be a guarantee of a buying window.
“I had one of our tenants looking for 120,000 square feet of offices, so I tried to go out and buy an office building for them,” he said. “Every building I found to buy I couldn’t because all of the loans were twice the value [of the property]. So as long as they still had a tenant or two and the properties were cash-flowing, they were not going to give them back to the lender.”
The company intends to raise money by preparing the paperwork to issue preferred stock, he said. He also noted that both the Microsoft campus and the Apple-occupied buildings carry no debt but could be easily mortgaged to raise additional sums for investment.
“We believe nearly every one of the deals made by opportunity funds [in recent years] will be in trouble because their loans are going to be higher than the [building] values, and the rents that they can get won’t even be close to what they need to justify it,” he said.
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