Palo Alto, CA (May 14, 2012)  
During the first quarter, Silicon Valley retained its status as the most dynamic and rapidly tightening U.S. office market, as the technology sector continued to secure space at an unprecedented pace. According to the Silicon Valley Studley Report, Studley’s analysis of office market conditions in 12 Valley submarkets, the region’s vacant available rate fell for the tenth consecutive quarter, dropping by 1.6 percentage points to 13.4 percent. The Class A rate decreased even more markedly, falling by 2.5 percentage points to 19.9 percent.

Apple, which recently surpassed Exxon/Mobile as the world’s most valuable company, has had a dramatic impact on office leasing activity across the valley, nearly single-handedly driving vacancy rates down in submarkets surrounding its Cupertino headquarters. The tech giant has leased or acquired nearly one million square feet in Sunnyvale and may be taking additional space over the next six months. In Sunnyvale/Cupertino, the vacant available rate dropped by 5.5 percentage points to 13.4 percent in the first quarter. The availability rate for this submarket was 34.5 percent just a year ago.

“Apple, like Google, is in the process of building a mega-campus to accommodate its ferocious expansion. Once both companies have completed their campuses and consolidated operations, there may be an opportunity for tenants to take advantage of the freed-up space,” said George Fox, Studley senior vice president and branch manager of the firm’s Silicon Valley office. “As the market continues to tighten, tenants are becoming more proactive and creative in their office leasing decisions.”

Driven by the technology sector, Silicon Valley is the first among major U.S. metros to reach a new peak in office using employment. Based on revised benchmark data released in March of this year, office-using employment in Silicon Valley was 3 percent above its prior peak in 2008.

Asking rents fall

Despite the high level of leasing activity, asking rents declined in the first quarter. Overall asking rent stood at $2.48 per square foot, per month, down by 6.2 percent for the quarter. The Class A rate, $2.83, registered a decrease of 9.6 percent.

Tenants expand horizons

As the number of the large, quality blocks of space available for lease declines, tenants are exploring build-to-suit or purchase options. Additionally, adaptive reuse of existing space and developer conversion of planned retail and residential projects to office are creating opportunities for smaller tech start-ups or professional and business services sectors.

Speculative development is also underway in markets with high demand and low availability of quality office space.

Major transactions

While the technology continues to dominate leasing activity, a number of other industries, including legal, advertising, consulting and pharmaceutical, signed leases during the first quarter.

Market outlook

Lease terms in Silicon Valley’s Class A office market are expected to become increasingly challenging as 2012 progresses, while the Class B and C office markets will stabilize and even ease during the year.