Cush & Wake: Q1 2014 San Francisco Peninsula MarketBeat Report

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San Mateo County’s high technology employment sector continued to add jobs at a pace of 2.2% through the year ending in March, according to Moody’s Analytics. This healthy growth is an improvement from the 2.0% state-
wide average and well above the 1.6% national average recorded during the same time period. Meanwhile, the local manufacturing employment base expanded by 2.5%, a strong performance following three straight years of job losses.

The overall vacancy rate for industrial space in the San Francisco Peninsula market is approaching historical lows at 4.7%, down 1.0 percentage points from this time last year and inching closer to the 4.1% recorded on the eve of the dotcom bust in 2001. There is currently no new speculative supply in the pipeline and we are tracking a number of industrial requirements expected to land during the next three quarters. As much of the quality space was first to go, remaining available options are less attractive and available for a premium price. We are watching to see how low vacancies will go before developers move forward with proposed speculative construction.

Tight market conditions led to continued rent appreciation through the first quarter of the year at $1.52 per square foot per month (psf/mo), a 5.6% increase from year-end and 31.0% higher year-over- year. This overall increase was led by landlords raising the rent for available high tech space through the first quarter resulting in a market-wide average of $2.61 psf/mo, a 14.0% increase from year-end and 41.1% higher than this time last year. High tech rent figures have surpassed the previous high-water mark of $2.27 psf/mo recorded at the end of 2008.

Leasing activity started the year at a much slower pace than the elevated figures recorded in 2013 with only 252,913 square feet (sf) leased. While this figure is 70.0% lower than this time last year, a slower pace of leasing is expected amongst extremely tight market conditions as there are limited options for tenants. Sluggish leasing during the quarter coupled with notable vacated spaces resulted in occupancy loss of nearly the same amount that was leased: 278,955 sf. The new space that was placed on the market will likely be absorbed quickly as these new availabilities are located in highly sought after submarkets of Palo Alto, Menlo Park and South San Francisco.

High tech employment growth in this market is poised to surpass state and national projections through the next two years, increasing by 2.7% through the next three quarters and maintaining a strong growth rate of 2.5% in 2015 according to Moody’s Analytics. Extremely tight market conditions coupled with a limited amount of supply in the pipeline will cause further upward pressure on asking rents as vacancy rates are expected to continue to trend downward.

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