High Rents Not Slowing Bay Area Office, R&D Markets

Bell Partners, Northern California, Bay Area, Bell Institutional Fund VI, Pennsylvania Public School Employees’ Retirement System

By Rob Goszkowski

The thriving Bay Area economy has set fire to the market for office and research and development space. Each submarket has been exposed to somewhat unique circumstances, but a common thread of expanding tech sector has been the tide that had risen the entire Bay Area market.

highway signSilicon Valley
“We’ve seen vacancy going down in Silicon Valley, and I think that will continue,” Jennifer Vaux, a Silicon Valley regional research manager at Colliers International told The Registry. “In Q3 of this year we measured 13.1 percent vacancy and availability.” The company reported an availability rate of 13.49 percent for R&D space as of Nov. 1 with an average asking rent of $1.32 per square foot.

“There is a fair amount of demand from tenants out there,” Vaux said. Currently, there are 136 user requirements of 20,000 square feet or more that Colliers is tracking in Fremont, Milpitas and Newark. “That’s relative to 90 users in the same time frame last year. The quality and footprint varies, but most are office space seekers.”

Venture capital data indicates that tech is leading the way. There were 157 deals for VC investment in software companies during the third quarter of 2013 for a cash total of $2.1 billion, more than all other sectors combined, according to statistics issued by PricewaterhouseCoopers. Employment in this submarket is strong overall, adding 5,358 jobs in August 2013.

Meanwhile, net absorption is showing some sings of fatigue: Colliers noted 1,828,212 square feet was leased in November 2013, compared to 2,008,023 square feet in November 2012.

Large companies doing the hiring may have smaller tenants looking over their shoulder, even as new construction projects reach completion. “I think that really, what the issue will become, as all of these tenants are being pushed out of multi-tenant buildings that are being absorbed by these bigger tech companies, the smaller ones will need to find a place to go.”

The Peninsula
“The bottom line is that the market is really strong,” said Mike Cobb, senior vice president of the Bay Area Peninsula market at Colliers International where he has specialized in industrial and R&D properties since 2002. “We have an office space vacancy rate in the third quarter of 11.68 percent. It’s been steadily coming down over the last several years.” The company’s Q3 Research and Forecast Report of the Peninsula observed three consecutive quarters of decreasing vacancy in San Mateo County.

That is driving lease rates up. “At the end of November, the average office rent was in the high $3 per square foot range for the entire Peninsula, including Palo Alto, Mountain View, Los Altos and into lower San Mateo County,” Cobb explained. That’s nearly $1 more per square foot than in Q3 2011.

R&D space has seen the market tighten as well; San Mateo County has a vacancy rate of 11.5 percent for R&D space. “We have the same pattern: rents have ticked up,” Cobb observed. “There are a lot of submarkets that have single-digit vacancy for R&D space—Menlo Park and Foster City, for example. Mountain View is extraordinarily tight.”

Meanwhile, major tenants are battling one another for space after a down market led to pent-up demand. Colliers is tracking 26 requirements for space that is larger than 20,000 square feet on the Peninsula. “One of the things we’re seeing is a real shortage of large blocks of space,” Cobb said. “Campus-type locations are at a premium. Those bigger deals drive markets quickly and aggressively.” Google signed two Mountain View leases in Q3 for 520,000 square feet of office and R&D space and 168,895 square feet of office space, respectively. Four other large-scale leases were signed during the same period, ranging from 60,000-100,000 square feet.

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