Prepared by Todd Campbell, Vice President, Research
The San Mateo County office market closed out 2013 with a vacancy rate of 10.9%. Vacancy increased 60 basis points over the past three months, rising from 10.3% (228,000 sf of occupancy decline). The increase in vacancy was surprisingly due to occupancy losses in central and southern San Mateo County where they combined for 242,000 sf of increased vacancy. Northern San Mateo County witnessed minimal gains due to technology company YouTube, a Google company, expanding by about 33% in San Bruno by signing a 94,000 sf deal at 1000 Cherry, the largest deal of the quarter in the county. YouTube now occupies just shy of 400,000 sf in San Bruno.[contextly_sidebar id=”1ece257c798301118fe517ccffb3426c”]Southern San Mateo County, which is comprised of Belmont/San Carlos, Redwood City, and Menlo Park experienced occupancy decline for the first time since Q1 2013 (121,000 sf ). In Redwood City, Informatica vacated almost 160,000 sf at 100 & 200 Cardinal Way during Q4 after purchasing two buildings totaling almost 300,000 sf at neighboring Pacific Shores Center in Q1 2012. This was the only large block space to hit the southern San Mateo County market in Q4, but with minimal leasing activity it made a significant impact. Central County recorded 122,000 sf of occupancy losses during Q4, finishing the quarter with a vacancy rate of 10.2%. North San Mateo County witnessed minimal occupancy gains in Q4 (14,000 sf), thanks in large part to the aforementioned YouTube expansion, ending the quarter 16.2% vacant.
Average Asking Rents have increased in each of the last twelve quarters in San Mateo County. The average asking rate for the county ended Q4 2013 at $3.50 psf full service. This is a 34% increase from Q1 2011 when the market started to bounce back from the recession. Tenants with expiring leases are now being faced with tough renewal/relocation decisions as their rent in some cases will increase by 50-100%.
Quality downtown office space was at a premium in San Mateo County during 2013 and will continue to be in high demand moving into 2014. Demand is being fueled by technology companies looking for creative space positioned adjacent to services and mass transit. This has led to a real shortage of quality downtown office space close to public transportation. Developers have taken notice of this as Hunter/Storm and Kilroy Realty Corporation have teamed up to develop Crossing/900, a 300,000 sf downtown Redwood City speculative office development. Construction is underway and is expected to be delivered in early 2015. San Mateo County has 15 other entitled build-to-suit office developments in the pipeline totaling just under 8 million sf.
The major challenge for landlords in San Mateo County will be in older, more traditional style office buildings that aren’t positioned in downtown markets. However, tenants seeking bargains will be forced to relocate to suburban class B/C office buildings, which could help decrease vacancy for this type of product.