By: Scott Anderson
The Silicon Valley R&D sector is expected to rebound from the negative effects due to the COVID-19 pandemic, according to industry experts. A recent analysis provided by Newmark provides reasons for optimism, as well as some specific trends: Gross absorption and tenants in the market have begun to reach pre-pandemic levels during the third quarter of 2021.
The overall future scope is anything but bleak, as many are optimistic about the future of the R&D market. “Breadth of touring tenants as a leading indicator plus large, mega-cap tech lease/sale deals are the biggest two components of optimism,” said Joe Kelly, executive managing director at Newmark.
After suffering negative net absorption due to the pandemic last year, the Silicon Valley R&D market has continued to see significant improvements during the third quarter of 2021. Total gross absorption in the area hit 1.9 million square feet during the third quarter of 2021, and while this is down from 2.4 million square feet last quarter, it is higher than 1.5 million square feet from one year ago.
Meanwhile, the largest impact of net absorption in the area during the third quarter was located in the cities of Milpitas, San Jose and Sunnyvale, as seen in Newmark’s report. The three cities combined had negative 611,185 square feet of net absorption, due in large part to vacancies in 25 listings totaling 900,000 square feet. Positive net absorption was found only in Los Gatos and Newark, with totals of 38,212 square feet and 101,949 square feet, respectively.
Vacancy rates in the area, according to the Newmark analysis, ended at 12.7 percent, up from 12.6 percent last quarter and 12.2 percent one year ago as most submarkets saw a slight increase in vacancy rates. Vacancy rates increased most significantly in the cities of Campbell and Mountain View, as Campbell posted an increased rate of 2.4 percentage points to 9 percent while Mountain View saw an increased rate of 1.3 percentage points to 9.9 percent. Meanwhile, the cities of Los Gatos and Newark had the largest decreases in vacancy, as Los Gatos decreased 6.8 percentage points to 10.6 percent and Newark decreased 4.9 percentage points to 6.7 percent.
Some of the more recent lease transactions seen in Newmark’s analysis included one deal over 100,000 square feet, 11 deals over 50,000 square feet, and 16 deals over 20,000 square feet. Of those transactions, notable ones included Personalis leasing 100,808 square feet at 6600 Dumbarton Circle in Fremont, CommScope renewing their lease of 96,415 square feet at 350 Java Drive in Sunnyvale, Quantumscape renewing their lease of 87,125 square feet at 1730 Technology Drive in San Jose, Credo Semiconductor leasing 87,088 square feet at 110 Rio Robles in San Jose, and Velo3D leasing 81,704 square feet at 2710 Lakeview Court in Fremont.
Asking rates in Silicon Valley, on a monthly triple-net basis, have decreased in most markets dropping to $2.36 per square foot from last quarter’s $2.45 per square foot as seen in Newmark’s report. The cities of Campbell and Mountain View saw the largest decreases, with Campbell decreasing by $0.37 per square foot and Mountain View decreasing by $0.21 per square foot. The cities of Fremont and Newark were the only to see positive increases, as Fremont saw an increase of $0.42 per square foot to $2.08 per square foot while Newark saw an increase of $0.19 per square foot to $2.00 per square foot.
According to Giovanni Giannotta, Research Manager at Newmark, in an ideal world landlords could collect contract rates as opposed to asking rates for their analysis. “The issue is we don’t get enough deal rates to have a good enough data set. Larger deals also rarely disclose comp details,” said Giannotta. “Further, it would be too erratic of a data set, and some quarters we could get deals that really skew the rate (i.e. sublease spaces). Asking rates are much easier to get for Silicon Valley data. It is the best way to ensure data integrity and consistency.”
Yet while leases in the area have been relatively quiet, sales have been seeing some strong, significant transactions.
Newmark notes that some of the larger sales transactions included Exeter Property Group purchasing the Assembly at North First in San Jose at 489,484 square feet for $192 million at $393 per square foot, Apple purchasing five currently occupied buildings at Mariani Avenue and Valley Green Drive in Cupertino at 447,000 square feet for $450 million at $1,007 per square foot, and Bridge Development purchasing 3 buildings at Qume and Commerce Drive in San Jose at 379,970 square feet for $134 million at $353 per square foot.