JLL: High-Technology and Healthcare Driving Office Demand in Northern California

San Francisco

  • The third quarter revealed a significant uptick in activity with two deals completed over 100,000 square feet at the close of the quarter. While leasing activity remains down 7.0 percent year-over-year, it’s a marked improvement from the first half of the year.
  • Total net absorption posted solid gains this quarter, coming in at just over 345,000 square feet, bringing total net absorption year-to-date to 816,880 square feet.
  • Two separate speculative developments broke ground on the heels of strengthening market fundamentals and a significant pipeline of tenant demand. Each development project will deliver four 100,000-square-foot blocks of contiguous space.
  • With over 6.5 million square feet of active tenant requirements and 15 tenants in the market for over 100,000 square feet, leasing activity is expected to pick up well into the fourth quarter.

East Bay

  • Economic improvement in the region is contributing to more stable market conditions.
  • The Emeryville submarket has been most active in terms of touring and leasing transactions, and has become an option for priced-out San Francisco tenants. As a result, the Powell Street area is 90 percent leased. UCSF, Stanford, and Art.com represent either new transactions or expansions for a total of 70,000 square feet in Emeryville.
  • Small tenants in Oakland have been more active in terms of touring and have been leasing portions of large blocks of space causing depletion in overall supply. The East Bay market has also seen large blocks of space dwindle as large corporate users secure space in the anticipation for additional company growth.
  • Asking rates remain the highest in Oakland’s CBD, with an overall average of $2.43 per square foot per month compared with $2.26 per square foot per month in the total East Bay’s suburban market. Rents have gradually risen in nearly all submarkets and will likely continue on this trend as landlords gain additional market leverage in many submarkets in 2014.

Silicon Valley

  • The signing of multiple large transactions in Silicon Valley has sparked another wave of market buzz leaving many to wonder when leasing velocity in Silicon Valley will ever slow down.
  • North San Jose has yet to see any groundbreaking deals given its heavy R&D base; however, the Orchard Parkway corridor is undergoing a significant transformation, as there is approximately 900,000 square feet of R&D rehabilitation projects currently underway.
  • Investors are still showing great interest in prime Silicon Valley assets. Properties in Palo Alto and Mountain View continue to sell at record prices. Buyers are still taking advantage of the favorable lending environment, looking for well-placed assets.
  • Demand is expected to remain on this positive trend throughout the rest of the year given rent growth and current leasing activity.

SF Peninsula

  • While a majority of the transactions still fall within the 10,000- to 35,000-square-foot range, the demand for larger blocks of space has increased.
  • The limited supply of Class A space options larger than 10,000 square feet in Palo Alto is pushing touring activity north toward Menlo Park and Redwood City. This additional demand has fueled rent growth for premium Class A space, while market conditions in core areas like South County and the 92 Corridor have tightened considerably over the past 12 months.
  • Although there has been a rise in the number of available subleases, demand for this type of space has been high, as shorter terms and lower asking rents are an attractive option for young startups that have yet to prove themselves financially, but are looking for expansion space to accommodate future growth.
  • Hunter Storm’s 900 Crossings development in Downtown Redwood City could break ground as early as the fourth quarter, and could be the catalyst for more development. Additionally, Jay Paul recently outlined his plans for the former Malibu Grand Prix site in Redwood City.

NorCal claims three of the top five rent growth markets
High-technology and health care are driving demand in Northern California, helping to generate more than 4.0 million square feet of net absorption year-to-date and a decline in total vacancy of 80 basis points to 14.9 percent. Despite making up just 6.9 percent of U.S. inventory, Northern California accounted for 15.1 percent of total U.S. net absorption in the first three quarters of 2013.

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