San Francisco, Peninsula, Silicon Valley Leasing Are Mixed Bag

By Sharon Simonson

Silicon Valley saw strong office occupancy expansion in the third quarter even as San Francisco and San Mateo counties struggled.

According to numbers being released Oct. 12 by commercial real estate brokerage Cassidy Turley, the valley’s vacancy rate fell by nearly a full percentage point to 13 percent in the three months ended Sept. 30. The market clocked its strongest quarter in at least five with 1.4 million square feet of net absorption.

The valley’s much larger research and development sector fared less well with vacancy rising slightly to 12.9 percent and a more than 300,000-square-foot occupancy loss. In Palo Alto, the former Facebook Inc. offices on Page Mill Road came back to market for lease, adding 265,000 square feet of vacancy. In Santa Clara Yahoo! Inc. shed 118,000 square feet.

That said, were the valley’s 66 million square feet of offices and 141 million square feet of R&D space combined, the occupancy increase still would exceed a million square feet, the brokerage reported.

Meanwhile, San Francisco recorded more than 360,000 square feet of occupancy losses, led by givebacks of more than 100,000 square feet each in the South Financial District and Yerba Buena submarkets. Average asking rents fell about 3 percent, the first time that city landlords have pulled back in 30 months. The vacancy rate rose from 9.4 percent to 9.8 percent.

The office vacancy rate in San Mateo County also rose more than a full percentage point to 13.9 percent. It is the third consecutive quarter of leasing weakness on the Peninsula, which has lost 240,000 square feet of office occupancy in the last nine months.

Paradoxically, the softness in San Mateo County office occupancy does not stem from weak tenant demand, Cassidy Turley reports. Rather, it is a mismatch in supply and demand. User requirements in the marketplace are up 18 percent over the last quarter at 2.2 million square feet. But most users are tech companies seeking 10,000 square feet or more, and 82 percent of the space available to lease is 10,000 square feet or less.

“Silicon Valley is still going great guns,” said Cassidy Turley Research Director Garrick Brown. “The question in San Francisco is if the boom is going bust. We are still tracking more than five million square feet of requirements [in the city].”

Some property market observers believe decision makers are holding off on new commitments until after November’s election when there presumably would be greater clarity on future tax policy and other issues, Brown said. “But I am hesitant to put this all on the election. There is a general sense of wariness about the economy, and regardless of how the election goes, I don’t think we are going to see an immediate big bump.”

He does expect the Peninsula and San Francisco to return to occupancy gains in the year’s final quarter though the pace of the market is likely to slow. His optimism about San Mateo is based on leasing activity that is in the works, he said. He is less sure about San Francisco. “Financial and business services remain problematic, they did give space back this quarter, which they hadn’t really been doing for the past year,” he said.

Based on data from CoStar Group Inc., which tracks gross and net absorption based on move-in and move-out dates, San Francisco County has already seen 337,000 square feet of negative net absorption in the first 11 days of the fourth quarter. San Mateo County has had 220,000 square feet of occupancy losses in the same time.

West Coast Commercial Real Estate News