Colliers International Q1 2014 San Mateo County Market Report

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OFFICE OVERVIEW
After a very solid year of marked improvement across the board and absolute frenetic activity in the high demand core locations, the San Francisco Peninsula commercial real estate market kicked off the first quarter of 2014 at a more measured pace.

The vacancy rate for the San Francisco Peninsula has leveled off somewhat after the extraordinary improvements of the past year and currently stands at 9.76 percent. Available square footage is slightly higher than at the close of 2013 after experiencing the first quarter of negative net absorption in a year at negative 109,057 square feet. San Mateo County saw a nominal decrease in the amount of available space with vacancy at 11.28 percent and net absorption at negative 14,561 square feet.

Gross absorption, a measure of all leasing activity in a market area, remained brisk but was down slightly on the San Francisco Peninsula, totaling 1,255,792 square feet for the quarter. While this is slightly below the past two quarter’s total, it is within the average range seen in the past two years. San Mateo County’s gross absorption total of 779,255 square feet was similarly off from the past few quarter’s activity, but well within recent averages.

Rents can be a trailing indicator for the strength of a market, but it is not clear whether the slower growth of asking rates on the San Francisco Peninsula over the past few quarters actually signals a slowdown. The current average asking rate of $3.90 FS on the San Francisco Peninsula and $3.54 FS for San Mateo County is the highest since the dot-com days, but the rate of growth has slowed for the San Francisco Peninsula, with two quarters of no rent growth followed by the most recent quarter’s 2.0 percent uptick. Given the growing scarcity of available higher-end leasing opportunities, it is not unreasonable to think that rent growth is actually constrained by the market’s strength.

Once again, the San Francisco Peninsula was buoyed by the disproportionally strong performance within a few small submarkets, as users continue to demand immediate access to the rail lines. In this quarter, over 50,000 square feet of net absorption was concentrated in the downtown cores of Palo Alto and Redwood City (two relatively small submarkets). This is just a drop in the bucket compared to overall market activity in the region, but a further indicator of just how focused tenant demand remains on these amenity-heavy locations. The vacancy rates in both these downtowns continue to plummet, and the new dynamic of user demand so drastically driven to these locations has become deeply entrenched.

Outside of some of the most active core submarkets, larger transactions were in short supply in the first quarter of 2014. A notable exception was Gilead Science’s 109,000 square foot lease in Foster City, the largest office transaction there in five years. Other major transactions of the quarter include Coupa Software’s 26,200 square foot San Mateo lease at The Crossroads, and Pure Storage’s 22,500 square foot lease in downtown Mountain View.

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