Time Might be Right for Industrial Occupiers in Silicon Valley

Silicon Valley, Transwestern Commercial Services, CREW SV, BNP Paribas Real Estate, Devencore

By Anna Mcquillan Rose

Anna Mcquillan Rose is a vice president at Transwestern Commercial Services (TCS), with 19 years of experience in the Silicon Valley commercial real estate market. She works closely with colleagues in Transwestern offices across the U.S, and in May this year, she received the Member Connection Award for leadership and collaboration through business-to-business relationships from CREW SV and The Registry.

The industrial vacancy rate in Silicon Valley ended the first quarter at 6.4 percent, one-third higher than the national average of 4.8 percent. If a move to a higher-quality space has been on a tenant’s radar, now might be the right time to make the jump, as only three of 12 buildings currently under construction have been pre-leased. 

Still, industrial asking rents in Silicon Valley remain the fourth highest among industrial markets nationally and have steadily risen for the past eight years. So, while a sluggish start to the year in leasing volume and strong development activity are creating ideal circumstances for expansions and upgrades, any prospect of saving money on space in the market is slim to none.

Tenants can benefit from seeing two or three surveys of available space that might fit their needs before even discussing a tour with their real estate advisor, just to allow a chance to get over the sticker shock. Even local business owners are finding that if they have been at their current location three years or more, prices for comparable space are now higher than what they have been paying, and that can include an in-place renewal since most are based on fair market value at the time the new term would start.

While I represent both tenants and landlords in my practice, the facts of the market are the same for all parties and everyone benefits from open communication. I often advise tenants who can consider other markets to open their search beyond Silicon Valley due to the high prices. But not every tenant can. Many small to mid-sized business owners are connected to the community, and their business is dependent on that location. For those clients, strategic planning is often about setting priorities when it comes to commercial space.

This market is proving false the common expectation that higher vacancy means landlords will reduce prices or make other concessions to fill space quickly. While sometimes true, other economic factors such as construction costs, debt costs and industry growth also play a factor. For these reasons, it is in the best interest of most landlords right now to hold out for the right tenant and not reduce rents, even if that means a space remains vacant in the short term. For some occupiers, this may mean rethinking square footage in order to fit a budget. For occupiers that can afford it, however, this marks an excellent opportunity to shop for unique and high-end space in one of the hottest markets in the country, at a time of relatively high availability.

About Transwestern Commercial Services

Transwestern Commercial Services (TCS) is a privately held real estate firm of collaborative entrepreneurs who deliver a higher level of personalized service and innovative client solutions. Applying a consultative approach to Agency Leasing, Asset Services, Occupier Solutions, Capital Markets and Research, our fully integrated global organization adds value for investors, owners and occupiers of all commercial property types. We leverage market insight and operational expertise from across the Transwestern enterprise, which includes firms specializing in development and real estate investment management. TCS has 34 U.S. offices and assists clients from more than 200 offices in 37 countries through strategic alliances with France-based BNP Paribas Real Estate and Canada-based Devencore. Experience Extraordinary at transwestern.com.

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