The Silicon Valley office market sustained its dynamic performance in the third quarter as steady hiring and anticipated expansion among the region’s top employers fueled demand for office space. Still, leasing activity in many of the Valley’s second-tier submarkets, including Milpitas, Downtown San Jose and Fremont, was weak, and more reflective of the lackluster tempo nationwide.
According to the Silicon Valley Studley Report, Studley’s analysis of office market conditions in 12 Valley submarkets, the region’s Class A vacant available rate fell to 17.9 percent in the third quarter and dropped 4.8 percentage points over the last four quarters. Additionally, the overall rate for vacant available space decreased by 0.8 percentage points to 13 percent.
Corporate campuses in favor
“The technology sector is turning to corporate campuses as a way to accommodate its ever-expanding footprint, “ said George Fox, Studley senior vice president and branch manager of the firm’s Silicon Valley office. “A campus setting typically provides a more interactive and collaborative environment than traditional offices, something tech companies value highly, as well as ample room to absorb additional growth.”
LinkedIn, for example, disclosed plans to build a new campus that will accommodate up to 2,900 workers, slated for occupancy in the summer of 2014. Samsung is deepening its presence in the region as well, and has signed a memorandum of understanding regarding the expansion of its 300,000-square-foot Silicon Valley campus facilities.
“As it will take some time for these complexes to be completed, companies are signing interim leases to handle their expansion and spillover demand from existing facilities,” noted Fox.
In addition to the corporate campus commitments, a number of other significant transactions were executed during the third quarter. The top three transactions were Amazon’s 581,977-square-foot lease at 100 & 1120 Enterprise Way in Sunnyvale/Cupertino; LinkedIn’s 560,362-square-foot transaction at 555 North Mathilda Avenue, also in Sunnyvale/Cupertino; and Dell’s150,000-square-foot lease at 5351 Great American Parkway in Santa Clara.
- Silicon Valley added 4,432 office-using jobs through August—a 1.7% year-to-date increase, just above the national year-to-date growth rate of 1.5 percent. Also as of August, Silicon Valley was 1.2% above its prior peak in office-using employment, while the U.S. average was still 40% below its prior peak.
- Overall asking rent stood at $2.53 per square foot, per month, up by 2.8% for the quarter. The Class A rate, $2.73, registered a decrease of 0.8%.
- Overall net absorption totaled 545,154 square feet, down by 56.5% for the quarter.
- On a trailing four-quarter basis, overall net absorption equaled 2.8 million square feet.
- The trailing four-quarter leasing volume totaled six million square feet, a drop of 29.2 percent for the quarter.
As new construction comes to the market and supply begins to increase in late 2013 and through 2014, large tenants will be afforded more opportunities in Silicon Valley’s top-tier submarkets. “An associated benefit is that as development takes off, municipalities have been leveraging these projects to fund much-needed public infrastructure improvements,” noted Fox.
Smaller to mid-sized tenants still have an abundance of options, particularly if they are geographically flexible, but should also be prepared for tightening concessions and increased rents as the technology industry expansion continues.