Palo Alto, CA (January 28, 2011)  

Silicon Valley posted solid leasing volume and declining vacancy throughout 2010, according to the Silicon Valley Studley Report, Studley’s analysis of office market conditions in 12 Valley submarkets. During the year, 16 leases totaling 100,000 square feet or more were completed, twice the number of equivalent-sized transactions closed in 2009.

 “Leasing activity throughout 2010 was quite top-heavy as large companies built up the reserves necessary to take advantage of the market’s outstanding opportunities,” said George Fox, Studley senior vice president and branch manager of the firm’s Silicon Valley office. “Companies ranging from giants like Google and Facebook to small start-ups such as Shock Technology added jobs last year, and the Valley’s increased office market activity reflected this expansion.”

“The tech sector continued to be critical to Silicon Valley’s turnaround, although companies from a wide range of industries contributed to the positive activity,” added Fox.

Positive net absorption

The region registered positive net absorption last year, indicating that companies were not just trading one office space for another. A total of 1.3 million square feet of office space was absorbed on a trailing four-quarter basis, with much of the activity occurring in Class A properties.

The Class A availability rate equaled 24.3 percent at year-end, and while still significant, represents a decline of 0.5 pp for the quarter and 3.5 pp for the year. The overall availability rate also decreased for the quarter and for the year, to 17.9 percent.

Some submarkets still vulnerable

Aside from Menlo Park, Palo Alto and Mountain View, which have seen a significant decline in availability, most submarkets have a wide range of opportunities, particularly for smaller and mid-sized companies. “Firms that are flexible geographically can generally negotiate very favorable lease terms, whether renewing or relocating,” noted Fox. “One submarket that tenants will likely look at more closely in the coming year is Downtown San Jose, which currently has a vacancy rate in excess of 25 percent. PwC’s 200,000-square-foot lease at Sobrato Tower, a project which has been vacant since 2005, is an important, although largely symbolic, step forward.”

Market outlook

While the local economy seems to be on the mend and the office market has certainly tightened, significant challenges still exist. California’s economy remains on shaky ground and the state’s fiscal health could impede the strength of the recovery in 2011 and 2012. It’s uncertain how measures to close the $20 billion budget gap, including continued service cutbacks and additional tax increases, will ultimately impact Silicon Valley and California overall.