By Meghan Hall
It is no secret that the current coronavirus pandemic has forced many companies to re-evaluate their space needs—or defer making real estate-related decisions all together. However, a number of new reports released by brokerage firm Avison Young shows just how much the office industry paused during the second quarter of the year, across the Bay Area. While experts now note that there is more movement in the market, there was a point where companies were simply waiting out the market, looking for others to make leasing decisions before committing to or changing their real estate plans, and some of the largest deals of the quarter were either subleases or renewals.
“For Northern California, there was a pretty consistent pause in market activity across all of the markets,” explained Avison Young’s U.S. Director of Office Research, Jennifer Vaux. “In large part leasing volume was down 50 percent across the Bay Area, and it seemed as though it was more of a wait and see mentality.”
Leases, if they were new, tended to be smaller or mid-range in size, while renewals were typically the biggest transactions. Of the data Avison Young compiled, Silicon Valley saw the most direct leases, which were all healthy in size. The largest lease in the submarket during the second quarter was from Tata Communications, who took 76,986 square feet at 3975 Freedom Circle in Santa Clara. Infoblox also took space in Santa Clara, signing up for 42,544 square feet on Mission College Boulevard, as did Anchronix Semiconductor, who took 36,736 square feet on Bunker Hill Lane. In Palo Alto, Plume leased 25,759 square feet of space on Lytton Avenue. The largest renewal of the quarter—the only one to be noted under Silicon Valley’s “notable” lease transactions—was Apple’s renewal for 39,961 square feet of space on De Anza Boulevard in Cupertino.
On the opposite end of the spectrum sat the Oakland and East Bay submarket. Six out of seven of its significant office leasing transactions during the quarter were new, but much smaller than in Silicon Valley. The largest new lease was Goldstein Borgen Dardarian & Ho.’s agreement to take just under 7,500 square feet of space on Grand Avenue near Oakland and Lake Merritt. Summer Search took 5,145 square feet in Oakland’s city center and undisclosed tenants secured nearly 7,000 square feet and 3,000 square feet of space on Grand Ave. and Franklin, respectively. The largest transaction of the quarter was a sublease: Bitwise Industries inked a deal for just over 16,000 square feet on Linden Street near Jack London Square—more than double the size of the next largest transaction. Based on Avison Young’s data, 17 percent of all space the market is for sublease, an increase of 160 basis points.
In San Mateo County, leasing activity measured a steep decline, with new leasing declining by 78 percent from Q1 and 86 percent year-over-year. Equinix’s renewal for its space in Redwood City was by far the largest transaction of Q2, with the multinational data center firm deciding to keep its nearly 125,000 square foot space on Lagoon Drive. Model N’s new lease at 777 Mariners Boulevard in San Mateo, where it took about 34,000 square feet of space, was the next largest leasing transaction, followed by Robinhood’s new lease for 23,000 square feet on Willow Road in Menlo Park. Rounding out the list was Kiewit’s 13,065 square foot lease in Belmont, located on Shoreway Rd.
“What we’re personally seeing is that things are picking up a little bit. It’s gone from kicking a can down the road to actually exploring opportunities,” stated Nick Slonek, principal and managing director at Avison Young. “That’s not the norm…but at least we’re seeing some activity.”
According to Slonek, those who were moving forward with deals during the second quarter were often looking to operationalize—looking at occupancy strategies and the impact it has on their bottom line. Firms who were leasing during the second quarter were looking for ways to become more efficient in their real estate usage. Slonek also noted that the tenants driving leasing activity during the second quarter weren’t tech firms, but others.
“Professional services…those are the types of people that are very busy and actually doing well. It’s the tech firms that are backing off and not pursuing the growth they did,” Slonek added.
However, while companies may be out searching for a good deal, landlords are holding strong when it comes to leasing rates. In Silicon Valley, Class A asking rates came in at $4.82 per square foot full service, while in San Mateo Class A rates came in at $5.48 per square full service, up from $5.20 per square foot during the second quarter of 2019. In the East Bay and Oakland market, the average annual asking rate for Class A inventory came in at $4.88 per square foot, about on par with rates from the first quarter of the year. Rates are simply holding because in the end, there is not enough deal volume for landlords and tenants to gauge the market, said Avison Young.
“Landlords do not have a lot to go on,” said Slonek. “I think by Q4 if there isn’t significant data or leasing traction or volume that landlords will start offering more concessions.”
However, until the coronavirus itself is contained, and public health orders can be lifted, Avison Young predicts that commercial real estate’s uncertain reality will continue for the near term.