Silicon Valley Office Market

In the third quarter of 2023, the iconic Silicon Valley commercial real estate office market faced ongoing challenges. Net absorption recorded a negative 1.8 million square feet, surpassing the Q2 2009 record during the Global Financial Crisis of 2007-2008. The decline in net occupancy was multifaceted, influenced by reduced office demand amid evolving remote work trends, stubborn interest rates, and uncertainties in the technology sector’s hiring patterns post-Covid layoffs. Additionally, the cautious venture capital environment was shaped by uncertainties about the economy and impending Federal Reserve interest rate decisions.

Despite a 90 basis points increase in the overall vacancy rate to 12.5%, average asking rents remained surprisingly near historic highs at $5.37 per square foot Full Service. The slight decrease in asking rents, down 0.9% quarter-over-quarter, might signify a market correction due to low demand and a lack of new leasing activity. Sublease availability rose to 7.0%, totaling 8.5 million square feet, driven by large tech tenants subleasing their spaces. Sublease activity played a pivotal role in the overall increase in availability across Silicon Valley.

The Silicon Valley commercial real estate office development pipeline, totaling 66.4 million square feet, includes 5.1 million square feet under construction, with 62.7% pre-leased. In the next 12 months, 2.0 million square feet are set to deliver, with market conditions affecting several developments and potentially impacting delivery timelines. Gross absorption, measuring non-renewal leases and user-sales, hit a three-year low at 708,052 square feet in Q3, significantly down from the 2.6 million square feet recorded in the same period of 2022.

The challenging financial environment continued to impact capital markets, with 10 transactions in Q3 totaling $260.7 million, down 14.7% quarter-over-quarter, averaging $370.0 per square foot.

Silicon Valley Industrial/Warehouse Market

In the commercial real estate industrial and warehouse sector, Silicon Valley maintained its strength in Q3. Net absorption was positive at 23,444 square feet, reducing vacancy to 2.0%, nearing an all-time historic low. The availability rate remained at 3.3%, but anticipated deliveries in Q1 2024 may increase upward pressure. Year-over-year asking rents rose by 7.5% to $1.44 NNN. Limited inventory and new development deliveries constrained leasing velocity, prompting tenant renewals at higher rates.

Gross absorption recorded approximately 1.0 million square feet in Q3, a 12.0% decrease from the three-year average. Sales activity, totaling over $215 million with an average price of $436 per square foot, displayed signs of recovery. Prologis and BentallGreenOak were notable contributors to the active quarter.

The development pipeline, totaling 10.9 million square feet, includes 2.1 million square feet under construction. Approximately 15.8% are pre-leased, providing relief for prospective tenants in 2024.

Silicon Valley Research and Development Market

The Silicon Valley commercial real estate R&D market experienced a slowdown in Q3 2023, with San Jose, Milpitas, and Fremont contributing to occupancy loss. Net absorption remained negative at 661,075 square feet, the lowest since mid-2021. Despite this, average asking rates increased by 5.5% year-over-year to $3.05 NNN, reflecting low vacancy rates. Sublease availability stood at 2.6%, totaling nearly 3.5 million square feet, with notable additions in Mountain View, San Jose, and Fremont.

Leasing activity slowed down in Q3, with the majority of transactions being sale leaseback, renewal, or lease extension. Sales activity declined 10.5% year-over-year to $88.3 million, with an average price per square foot of $456. Notably, owner-user sales contributed to two out of three transactions in Q3.

The decline in Venture Capital funding impacted demand in the R&D market. However, despite the drop, the R&D market maintained reliability in Silicon Valley. With low vacancy rates and restricted supply due to no new deliveries in Q3, the R&D market witnessed near historic-high average asking rates, instilling confidence in its stability.

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