Corporate Consolidations and New Construction Driving Office Availability in Silicon Valley

JLL Silicon Valley San JoseSanta Clara Irvine Company SteelWave Ericsson Palo Alto Networks IBM Santa Clara Square America Center

JLL Silicon Valley San JoseSanta Clara Irvine Company SteelWave Ericsson Palo Alto Networks IBM Santa Clara Square America Center

By Jacob Bourne

JLL’s Silicon Valley Snapshot for February shows that over the past six months, there’s been a significant increase in the amount of space availability in Silicon Valley for large blocks of at least 100,000 square feet. The research predominantly reflects Class A and B office space but also includes some renovated R&D-Flex spaces that often fulfill offices uses. While the chart shows a slight uptick in availability for Class B product, the jump in available space for Class A is an indicator of recent change occurring in the Valley since last September. In that timeframe, the volume of large block Class A space has gone from 3.4 million square feet to 5.2 million square feet. The main takeaway from the data is that new supply coming into the market is working in conjunction with an influx of sublease space to outpace the current demand.

[contextly_sidebar id=”fhptg5XHuFYpBziYiJttD4kROeetIZM8″]“Generally, there’s been a healthy amount of big corporate consolidations as well as some mergers & acquisitions that are impacting demand for larger blocks,” said Steve Clark, executive vice president, JLL.

Several projects flowing through the development pipeline over the last year and a half are now being delivered, especially in Santa Clara and San Jose, which together have 60-percent of the available large Class A blocks. The Irvine Company currently has leasing opportunities for nearly one million square feet of office at its Santa Clara Square on Augustine Drive. In San Jose, SteelWave has phase II of America Center under construction to offer 457,450 square feet once complete. Both of these developments are geared for single-floor or even single-suite tenants, illustrating the strong demand for smaller tenants in the Valley right now; a trend possibly stimulated by greater caution exercised by start-ups in a more restrained venture capital climate.

“As more buildings are demolished and repurposed or redeveloped throughout the Valley, many smaller tenants are being displaced and that obviously has owners of multi-tenant buildings enjoying what’s going on,” Clark commented.

Other changes on the part of major corporations have also had an impact on the numbers. Ericsson’s former San Jose corporate campus remains vacant after the company consolidated its Silicon Valley workforce in Santa Clara. Other companies like Palo Alto Networks and IBM have also put sublease space on the market due to consolidation activities. The increase in sublease vacancies has coincided with the fact that there haven’t been as many users in the market looking for big blocks, but from Clark’s perspective, this doesn’t necessarily mean that things are unhealthy right now. However, with the large amount of product, demand isn’t likely to outpace availability in the near term.

“It would be hard to imagine rental rates are going to continue to rise in the near term for the bigger blocks of space in the greater Valley,” he concluded. “Some downtown markets may be a little different, but I don’t expect that rental rates in San Jose and Santa Clara are going to rise at the pace of the past five years.”

West Coast Commercial Real Estate News