By Daniel Smith
Despite a slowdown in office leasing in the Silicon Valley, rents continue to creep upward and are particularly strong on the Peninsula, according to a new report by Savills Studley.
The Silicon Valley Office Sector report for Q1 2016 documents considerable activity in downtown and northern San Jose, but at rents significantly lower than Peninsula cities.[contextly_sidebar id=”b0RWZZCZQmFR0vISuWLtY3COYFHaQans”]“I would say the Peninsula – Menlo Park, Palo Alto, Mountain View – are all extremely strong markets,” opined Scott Kinder, corporate managing director for Savills Studley. “They haven’t shown signs of weakening…. They’re getting their asking rents.”
A square foot of office space is running from $1.76 in Milpitas to $6.09 in Palo Alto, with South San Jose close to the valley average of $3.65 and other parts of the city in the high $2 range.
“I think downtown San Jose is finally hitting its stride,” Kinder said regardless. “There’s been some pretty good activity downtown lately.”
Of the 12 Valley communities individually tabulated, the only ones where asking rent declined from 4Q 2015 were Milpitas (-7.2%), Mountain View/Los Altos (-5.1%) and North San Jose (-0.1%). At the other end of the spectrum were increases in South San Jose (20.8%) and Menlo Park (20.1%), with 2.3% being the average hike.
The report noted that deal volume has slowed, but not as much as in San Francisco, with 7.5 million square feet (msf) leased in the last four quarters. That is on par with the market’s long-term average of 7.4 msf but represents a 14.1% decrease from the prior four quarters.
The report seeks to place the slowdown in the context of economic conditions for the high tech industry in 2016, observing, “Tech firms are paying a high price for going public or even securing private funding, as investors grow more skittish.”
Furthermore, observes Savills managing director Chris Errecart in the report, “Despite growing concern about the challenging conditions for start-ups and a weak IPO market, leading tech companies in the Valley continued to make major moves during the first quarter.”
Among the largest deals detailed in the report is the leasing by Toshiba of two North San Jose spaces at 55 W. Trimble Road totaling 313,160 square feet. Alternatively, leasing downtown “was once again driven primarily by non-tech sectors.”
Availability and vacancy rates have dropped together, with the overall vacant availability rate pegged as continuing its five-year decline down to 7.6%.
One anomaly in the report that Kinder conceded “doesn’t make a lot of sense” is when properties are divided between A, B and C classes. The asking rent for the inferior B and C classes is actually higher at $3.67 per square foot than the $3.59 average for Class A.
“All asset classes are rising, but the ‘A’ … is showing signs of topping off,” he noted, citing a second straight year of consistent rates. “It’s just been a constant uptick, and nothing lasts forever.”