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From Site Selection magazine, March 2011

Optimists Club

High-tech, cleantech, bio and logistics provide
economic momentum for a beleaguered state.

Fast-growing Google has acquired a facility known as the “Binoculars Building” in Venice.
Photo courtesy of W.P. Carey

Tim Bajarin (top) is head of Creative Strategies, a technology consultancy. Ross Deuber (middle), president and CEO, ZPower Battery. Stephen Levy is a California economist.
Tim Bajarin (top) is head of Creative Strategies, a technology consultancy. Ross Deuber (middle), president and CEO, ZPower Battery. Stephen Levy is a California economist.

ould it be that there is finally some reason for optimism regarding the California economy? The technology sector is displaying some job-creating power, and exports and overall container traffic are up at the huge ports of Los Angeles and Long Beach. Also, more than 40 percent of the state's biotech CEOs say they will increase manufacturing in the state in 2011.

Several Internet and tech companies are certainly up to something big with a flurry of major real estate moves in late 2010 and early 2011. Facebook, Apple and Google are among the firms acquiring huge amounts of space to accommodate growth.

Tim Bajarin, president of Creative Strategies, a Campbell, Calif., consultancy, says tech sector real estate expansion is cyclical and happens about once a decade.

"As each tech company becomes bigger and has to support more personnel, their campus needs change," says Bajarin, a well-known tech sector analyst. "Tech is coming back — at least there is hiring in the tech sector. The things we need are software engineers and semiconductor engineers. We are not talking about blue-collar workers per se, because there is almost no manufacturing in Silicon Valley anymore."

Facebook plans a gradual move from its Palo Alto headquarters with the lease of the former Sun Microsystems campus in Menlo Park. The social network company said the site provides space to suit its long-term business needs and "allows us to recreate the small-community feel we enjoyed while in downtown Palo Alto."

The huge 57-acre (23-hectare) campus was built between 1993 and 1995 and served as the corporate headquarters for Sun Microsystems until it was purchased by Oracle Corp. It contains nine buildings totaling about 1 million sq. ft. (92,900 sq. m.). For possible future expansion, Facebook also purchased an adjacent 22-acre (9-hectare) tract connected to the campus by a tunnel underneath the Bayfront Expressway.

Facebook says the move to the new campus will occur in waves, with the first group moving in June or July. The company, which employs more than 1,400 in Palo Alto, will continue to occupy space there through the end of 2011 and possibly into 2012.

Facebook's new landlord is RREEF, the real estate investment management business of Deutsche Bank's Asset Management division, which acquired the property from Oracle America on behalf of the State of Wisconsin Investment Board, which committed $100 million to RREEF. Exact terms of the transaction were not announced.

Google has leased a 100,000-sq.-ft (9,290-sq.-m.) office complex in Venice known as the "Binoculars Building" from investment firm W.P. Carey. The well-known landmark, with two wings connected by a four-story pair of binoculars, will accommodate part of Google's recently announced growth initiative with 6,000 employees to be added globally this year. The campus formerly served as the headquarters for advertising agency Chiat/Day.

"Not only have we secured a solid long-term tenant for the property, but the creation of the Google campus in downtown Venice brings a large, vibrant work force to the neighborhood, solidifying the area as a hub for creative businesses," said W.P. Carey director Brooks Gordon.

In late 2010, Apple acquired the 98-acre (40-hectare) former campus of Hewlett-Packard in its home city of Cupertino. The property is adjacent to a 50-acre (20-hectare) tract Apple acquired in 2006. "When Apple does their next wave of expansion, which I believe will start next year, they will begin occupying it," Bajarin says.

Who's next on the tech expansion cycle? Bajarin suggests it could be Twitter.

"Twitter has already talked about expanding from their South San Francisco location," he says. "They could have explosive growth. We have not heard publicly how they will handle it. They like San Francisco, but they may decide they have to move further south to get more space."

Bajarin believes the vast human intellectual capital of the Silicon Valley will continue to draw tech companies to California.

"As each of these companies grows, the scramble for high-tech talent is increasing," Bajarin says. "You will see companies coming out here to start a business because they need to be where the talent is. The high-tech economy is driven by brainpower, and whether companies like it or not, they have to go where the brainpower is. Silicon Valley has the highest concentration of engineers and math geniuses of anywhere in the world."

Cleantech Advances

Another type of technology company is also moving to larger space in Silicon Valley. Solar energy company SunPower announced in November that it will remain in San Jose, relocating its headquarters to an existing three-building campus to accommodate planned, long-term growth. The company will renovate the buildings with the goal of achieving LEED Gold certification. The new headquarters will house the company's corporate staff that includes finance, communications, product development and engineering teams.

"We're pleased to be moving to our new headquarters and continuing our investments here in California thanks to the City of San Jose's economic incentives and the state's long-term energy policies," said Tom Werner, SunPower CEO. "This move to a larger campus reinforces our planned growth over the next several years, not just here, but around the globe, as we continue to design, manufacture and deliver the highest efficient solar cells and panels on the market today."

The City of San Jose has prepared a $2.5-million economic incentive package for the company over five years for permitting, work-force assistance, and utility and sales tax reimbursement.

A global company, SunPower employs approximately 6,000, with more than 900 in the U.S., most of whom are employed in the San Francisco Bay area. About 300 employees are based in the San Jose headquarters, with expected growth to more than 500 over the next few years. SunPower's Richmond, Calif., location houses approximately 400 employees, where the company also conducts light manufacturing.

California is a recognized leader in cleantech, which covers a wide array of sectors ranging from alternative fuels to energy storage to water treatment to recycling. Voters rejected a controversial initiative on last November's ballot that would have suspended a California law that requires utilities in the state to obtain a third of their power from renewable sources by 2020.

A thriving subsector of cleantech in California is battery manufacturing. One of the state's growing number of battery manufacturers is ZPower Battery, a manufacturer of high-energy, rechargeable silver-zinc batteries for microbattery applications, which opened a new assembly line at its Camarillo facility in November. Hearing aids are the first application for the batteries. The company has plans for growth as it expands in other applications.

"We are geared toward rechargeable batteries because in general we think they are better than disposable batteries from an environmental standpoint," says Ross Dueber, the company's president and CEO. "We target markets where traditional batteries have been used. It just so happens that hearing aid batteries are the best fit for us. We are working with hearing aid manufacturers to take their new product designs to enable them to run on rechargeable batteries."

Future applications for the batteries may include smart phones and laptop computers as the market moves toward alternatives to lithium-ion batteries, Dueber says. "We also have in our roadmap large-format batteries that could be used in hybrid vehicles," he says. "We are right down the road from SolarWorld, and one of the applications we will eventually be interested in is storage of solar energy. In terms of energy storage, the current climate for cleantech has never been stronger. I believe this is a unique time in our history when we will be able to move this forward at a meaningful step."

California's solar sector will get a definite boost with the planned 1,000-MW solar power plant called Solar Millennium near Blythe. The site would be the world's largest solar plant and would create 220 jobs and employ an estimated 1,000 during construction. The project has navigated the permitting process and is now waiting for a DOE loan to close.

Biotech Is Hiring

Eighty percent of biomedical company CEOs in California report that their companies have been courted by other countries, state governments or regional economic development associations in the past year, according to survey findings included in the 2011 California Biomedical Industry Report, published in February by the California Healthcare Institute, BayBio and PwC.

However, the survey found surprising consensus of confidence in the state's ongoing attractiveness to the biomedical industry, with many CEOs planning to increase jobs, manufacturing, and R&D operations within California versus elsewhere. The survey found that the unique ecosystem that has helped to build California's leadership in biomedical technology innovation may be fragile and short-lived unless both government and industry adapt to new challenges.

Here are some of the survey's key findings:

  • For the first time in the report's 17-year history, nearly twice as many biomedical CEOs said they intend to increase manufacturing within California (41 percent) versus outside the state (21 percent) over the next two years.
  • Sixty-eight percent of CEOs said they expected to expand the overall size of their work force within California, while only 31 percent planned to increase work force levels outside the state.
  • Seventy-eight percent of CEOs surveyed said that they maintained or expanded R&D operations within California over the past year, and 88 percent plan to do so over the next two years, with the majority of those (62 percent) saying that they expect to expand R&D within California.
  • The key reasons cited for locating in California were the availability of a highly skilled, entrepreneurial work force and California's culture of innovation, anchored by leading research universities.

One California firm that is expanding is BioMarin Pharmaceutical in Novato, about 25 miles (40 km.) north of San Francisco. The company has spent more than $60 million to expand capacity over the last few years and plans to add 100 employees to its current work force of 850 during 2011, according to company spokesman Bob Purcell.

Ports Rebound

Container cargo at the Ports of Los Angeles and Long Beach surged in 2010. The Port of Los Angeles saw container traffic grow by 16 percent in 2010 with a record number of exports. Port exports rose 10.3 percent in 2010 to 1,841,274 TEUs, compared to 1,668,911 in 2009, and surpassed the previous container export record of 1,782,502 TEUs in 2008. Meanwhile, imports increased 12.8 percent in 2010 (3,973,933 TEUs) compared to 2009 (3,524,386 TEUs).

"The 2010 volume gains far surpass our initial estimates, and we've been able to facilitate some export opportunities in the past year through our TradeConnect initiative and increased networking with local business stakeholders," said Geraldine Knatz, Port of Los Angeles executive director.

Containerized cargo at the Port of Long Beach increased by 1.2 million units in 2010, the largest single increase of any seaport in the U.S. Port shipping terminals moved a total of 6.3 million TEUs last year. The jump represented a nearly 25-percent gain over 2009, and it was the largest one-year increase in the port's history.

"This was a tremendous rebound, and happened much faster than predicted," said Port of Long Beach Executive Director Richard D. Steinke. "Best of all, the additional cargo has brought back thousands of port-related jobs throughout the supply chain — and we're very optimistic that the job growth in this industry will continue in 2011."

The logistics sector is gradually improving. Dr. John Husing, an Inland Empire-based research economist, says the increase in port volume made for the fourth highest year in history with a forecast for another 500,000 to 650,000 containers to be added in 2011.

"As a result, we are seeing companies again actively seeking space in the Inland Empire," Husing says. "Gross absorption was 14.6 million square feet [1.35 million sq. m.] in 2010, compared to minus 4.7 million square feet [436,630 sq. m.] in 2009. Vacancy is right at 10 percent after being as high as 12.8 percent. For facilities of 500,000 square feet [46,450 sq. m.] and above, there are no facilities currently available."

Buyer's Market Ideal for Furniture Company

High Point, N.C.-based Home Meridian International describes itself as a furniture design, sourcing and distribution company for residential and hotel contract markets. Evolving through the years from its furniture manufacturing roots, the company now sources furniture through its manufacturing partners in Malaysia, Indonesia, China and Vietnam. Home Meridian recently relocated its Phoenix furniture distribution center to a new 1 million-sq.-ft. (92,900-sq.-m.) facility in Redlands, Calif. During its search for a new West Coast distribution center in the greater Los Angeles area in 2010, Home Meridian found itself in an ideal situation in terms of costs and suitable facilities.

"We had a distribution center in Phoenix because at one time we had a manufacturing plant a mile away," says Doug Townsend, Meridian's CFO. "When we looked at the costs, it didn't make sense to have it in Phoenix."

Townsend says the company, which expects to receive and ship approximately 10,000 containers annually through its new distribution center, chose the Redlands location because of its proximity to the Port of Los Angeles, about 50 miles (81 km.) to the west. Home Meridian will use the distribution center to serve several of its brands in markets across the U.S., Canada and Mexico, he says.

"It's quite a remarkable time to be a renter of commercial property," Townsend says. "Rental rates are extremely depressed. There is lots of extra space and there have been lots of new buildings sitting idle for a few years. It's a buyer's or renter's market."

Townsend says his company began its search by looking at 300,000-sq.-ft.-plus (27,870-sq.-m.) buildings that were available in the greater Los Angeles area ranging from the City of Industry to San Bernardino. The search found 50 suitable buildings and the company visited 22 before deciding on the Redlands building.

Townsend says the company will employ 30 to 40 people in Redlands. Home Meridian also operates a distribution center in Madison, N.C.

Economist: Give California a Couple of Years

Steve Levy is director and senior economist at the Center for Continuing Study of the California Economy (CCSCE), a private research organization in Palo Alto founded in 1969 to provide an independent assessment of California economic and demographic trends. He says that overall job growth in California remains slow like the rest of the nation, but he cites the tech sector and the state's rising exports as rays of optimism.

"Economic activity is picking up in tech, trade and tourism," Levy says. "The ports are reaching record levels in terms of exports and total trade. Tech sales, profits and stock prices are booming and a small amount of job growth has started."

As borne out by the real estate deals described above, Levy says the tech growth is being propelled by social networking and Internet-related companies, with the clean energy sector also posting small job gains. Construction, however, is the lagging sector, holding down overall job growth, he says. The Bay Area is leading the recovery based on tech and exports while inland areas are lagging, held down by housing and local government layoffs.

"Overall, California will match the nation in job growth for a year or two before again outpacing the nation as construction recovers and tech shines," Levy says. "Resolving the state budget challenge will be a major plus for the state's competitiveness if it happens."

Levy's biography on the CCSCE Web site describes him as having a reputation for being frank and provocative. He gave a demonstration of that with his response to a question regarding the impact of ongoing programs of other states to poach California companies.

"Every three months a million jobs disappear from businesses closing or contracting," Levy says. "Another million or so are added in California. At most 10,000 jobs might move out of state and some move in. All studies say the impact of inter-state moves is tiny. This is a media hype story. States are now rolling back these giveaways as they struggle to keep schools open. This is one reason why the governor is ending the giveaway of scarce taxpayer funds to companies to move from one area to another. The Chinese must die laughing at stupid Americans giving away precious investment resources to compete against each other, as they move forward as one nation."

Furniture importer Home Meridian International moved its western distribution center from Phoenix to Redlands.
Photo courtesy of Home Meridian International

Story in Pictures

Facebook plans to move into the former Sun Microsystems campus in Menlo Park.

Photo courtesy of Deutsche Bank
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