START-UPS, EXPANSION LIFT VALLEY OUTLOOK

Wondering what the job outlook in Silicon Valley is really like?

You could watch government employment reports, or monitor traffic on your morning commute. Or, for perhaps a more detailed picture, you could check the number of companies looking to lease office space.

Based on that measurement, real estate expert Kenneth Rosen thinks the valley's employment outlook is healthier than official numbers indicate. Rosen, chairman of the Fisher Center for Real Estate at the University of California-Berkeley, is forecasting job growth in the 15,000 range for 2006, up from his own estimate of 10,000 in December, "based on implied growth from the leasing side.''

Innovation might define the Silicon Valley business landscape, but old-fashioned real estate deals can be a clear predictor of where things are going. Particularly today when a growing company is as likely to hire in Bangalore as in Burlingame, office space commitments can serve as a strong gauge of local job activity.

Commercial leasing "gives us kind of a window into the future -- it's all based on expectations,'' said Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California. "Space is expensive, and companies would not lease it or try to buy it if they didn't have to, or if they had doubts about it.''

The fact that companies are looking for space doesn't guarantee they will hire. Economic conditions can change as they did during the dot-com bust, leaving companies stuck with their lease commitments. Still, since companies don't typically broadcast their local hiring plans, leases can act as a good predictor.

"If you take the leasing and say each person occupies 150 to 200 square feet, at least the leasing people think that these many jobs will be created in the next year,'' Rosen said. "It gives you an indicator of the optimism.''

Government employment surveys don't give a complete picture because they focus only on established companies, Rosen said, which would understate new jobs in areas such as Silicon Valley that have a lot of start-up companies.

Not counted, for example, would be numerous small firms like Riya, an image-search company that will roughly double in size in the coming months after it moves to a 4,000-square-foot office in San Mateo from its cramped 1,700-square-foot location in Redwood Shores.

"We all got to know each other really well,'' said CEO Munjal Shah with a laugh. "We're classic start-up -- keep it tight.''

The expansion will allow Riya to grow from 16 people to about 30 locally. In addition, it will lease more space at its Bangalore, India, operation.

Riya's real estate strategy is typical of early-stage companies, said Peter Rip of Leapfrog Ventures, one of the venture capital firms that participated in a recent $15 million round of funding. Because real estate is the second-highest expense for most companies, after head count, the goal is to keep that cost as low as possible for as long as possible.

Riya's current space "is like a sardine can,'' Rip said. "It has one conference room, and when you're trying to have a meeting in the conference room, the heat goes up about 10 degrees.''

Start-ups tend to get a sublease or short-term lease at their earliest stages, then the second wave of hiring is usually overseas, Rip said. Then, after a year or 18 months, they can shoot for more funding, more hiring, and an accompanying move.

"Our general bias with our companies is "be comfortable, but don't plan on success. Let success force your hand. ''

While it's hard to quantify the hiring plans of start-ups, some of the valley's biggest names are also in growth mode.

Yahoo leased more than 650,000 square feet of expansion space in the past year -- enough for more than 3,000 employees. And brokers say about a dozen companies are in the market for at least 100,000 square feet of expansion space.

Of course, not every company that signs a new lease is growing. Some new deals come out of moves after routine lease expirations. In recent years, many were part of a "flight to quality'' trend in which companies took advantage of falling lease rates and moved to nicer digs for the same or lower monthly rents.

"If you were to look at activity in tenants in the market in 2002 and 2003, probably 90 percent of the activity was more in the replacement space activity, so it wasn't an indicator at all of hiring plans,'' said Andy Poppink of Staubach, a tenant-representation brokerage. But now, "If you take into account Google, Yahoo, eBay, Symantec . . . I'd guess we're probably at a point where 50 percent of tenants are in the market based on growth.''

Anti-spam company Postini is one of those. Two years ago, it occupied 9,000 square feet in Redwood City. Now, after some interim expansions, it's moving into almost 60,000 square feet in San Carlos.

"They do have a growth plan that they're looking at -- quite an aggressive growth plan,'' said broker John Barsocchini of NAI BT Commercial.

That's just one example of a "very sharp pickup'' in Silicon Valley leasing that Rosen cites in his rosier employment outlook.

Between expansions, spinoffs, start-ups and virtual companies, "there is definitely a better job picture than two years ago,'' he said. "I think that the tech industry is definitely recovering.''