Landlord Concessions Slightly Elevated
“The Valley’s economy and office market got a taste of reality during 2016. Hiring and leasing activity moderated just as the latest wave of new properties in North San Jose, Downtown San Jose and Santa Clara looms on the horizon. Tenants can expect a moderation in rental rate growth in 2017.” – Peter Hamann, Savills Studley Corporate Managing Director
Highlights of the report include:
Rents have already begun to dip in weaker submarkets such as Santa Clara and North San Jose, where landlords have been more willing of late to strike a deal. Tenants can expect a bit more rental rate growth in 2017 in hotter submarkets, but it will not be as severe as in the last few years.
During the second half of the year the number of leases over 100,000 square feet slowed. In addition to a decrease in the number of pre-emptive discretionary leases, there is a related reduction in the warehousing of space. As more tenants adhere by their business plans, fewer leases are being based on fear factor – the worry that space must be hoarded to prevent overpaying or worse yet lack of inventory.
The Bay Area’s pre-emptive strike approach to expanding has now shifted to secondary markets such as Seattle and Austin. Employers based in the Valley who cannot find adequate talent locally are contributing to the rallies in these markets.
Conditions are still very tight in submarkets such as Palo Alto, Mountain View and Menlo Park. These areas continue to provide little breathing room for tenants. Outside of these areas, though, the market as a whole is seeing a moderation in the landlord-favorable conditions that have prevailed for the last two to three years. Larger concession packages and more favorable terms are being offered to tenants and rent is starting to shift in the outlying submarkets.
More than 6.0 million square feet of new construction is scheduled to deliver in the next two years. This should put some tenants in the position to gain leverage as the supply pools deepens and more options open up.
As the time to lease up newly constructed space increases, a few owners are realizing that they need to raise tenant improvement allowances to induce tenants to move. Some owners are being more aggressive than others – a few are increasing rent abatements to fill big blocks of space now before market conditions change any more.
Since hitting a peak of 11.6 msf in mid-year 2015, four-quarter trailing leasing has steadily declined, and fell below 6.0 msf in the final quarter of 2016.
CLASS A AVAILABILITY RATE UP YEAR-ON-YEAR
Following an increase in the third quarter, the region’s overall vacant availability rate fell by 50 basis points to 8.6%. The Class A rate (8.9%) was unchanged from the third quarter, but has spiked by 130 basis points from year-end 2015.
RENTAL RATE JUMPS
Regional overall asking rent, $3.73, rose by 1.4% during the fourth quarter, and has increased by 4.7% year-on-year. Class A rent posted a sharper 9.8% quarter-on-quarter increase and has spiked by 11.0% from year-end 2015.
SHARP DROP IN SALES
Office property sales have dipped from $6.1 billion in the first 11 months of 2015, to $3.4 billion through November of 2016 – a 44.5%.
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