Fund managed by Morgan Stanley Real Estate Investing buys Milpitas R&D building for $84.1 million

JLL Capital Markets has completed the $84.1 million sale of 601 McCarthy, a 189,481-square-foot R&D building in Milpitas, Calif., to a fund managed by Morgan Stanley Real Estate Investing. The buyer is a fund, not the platform itself, and the trade was all cash at $444 a square foot. JLL represented the seller, whom the announcement does not name.

What the fund gets for that price is a building whose most expensive components were paid for by someone else. KLA Corp., a manufacturer of semiconductor process control and inspection equipment, leases 100 percent of the property, which serves as a critical R&D and data center facility and sits a short walk from the company's Milpitas global headquarters. The building dates to 1998 and was renovated in 2017, rising two stories on a 9.7-acre site with 620 parking spaces and large floor plates. Its electrical service runs to 6,000 amps, and the announcement credits KLA with substantial recent investments in the property, including a significant data center expansion and power infrastructure upgrades.

Those tenant-funded improvements are the likely basis for the pricing, an inference the announcement invites without stating. The same announcement gives no lease term, no rent and no expiration, which leaves the entire rent roll resting on a single credit and the underwriting resting on one semiconductor tenant's commitment to a site it has already spent money inside. Paying all cash keeps a lender out of that judgment, so the fund's basis is its own read of one lease and the equipment behind it.

The address sits at the intersection of State Route 237 and Interstate 880, inside Silicon Valley's Golden Triangle, the Milpitas–North San Jose corridor the announcement describes as home to headquarters and major operations for Cisco, Western Digital, Micron, Applied Materials and SanDisk. R&D tenants of that scale are the demand pool for space with 6,000 amps behind it, and a building already wired for a data center is a cheaper way to reach that pool than building the capacity from scratch.

The next comparable test is any Golden Triangle R&D property that comes to market without a data center and 6,000 amps inside it. When that trade prints, $444 a square foot will read either as the going rate for Silicon Valley R&D or as the premium attached to improvements KLA paid for.