Silicon Valley Office Entering Seventh Year Of Growth, But Vacancy Rising

Companies are going big in Silicon Valley. Over 20 leases signed last quarter were for over 100k SF, including new leases from Google, Cloudera, AMD and FireEye, according to a recent Savills Studley report.

Google leased 598k SF of the new Moffett Gateway in Sunnyvale, while Cloudera leased all 225k SF at 395 Page Mill Road (above) in Palo Alto. Demand for large space overshadowed a decline in demand from small and midsized companies last quarter.

Year-over-year asking rent also rose. Silicon Valley’s asking rent increased 5.4% last quarter from a year ago, with Class-A rates increasing 3.6% year-over-year. South San Jose and Menlo Park saw the biggest increases of 24.5% to $4.36 and 34.4% to $7.16, respectively. A previous study from Cushman & Wakefield revealed Menlo Park submarkets had among the highest asking rents in the country.

Silicon Valley will enter its seventh year of expansion next year, making it one of three markets, including San Francisco and Austin, with a similar growth rate, according to Savills Studley. By the end of this year, these three markets will see office-using employment upwards of 40% above the peak set prior to 2008.

Despite the stability in the market and strong growth, as of the end of last quarter only 53.7% of the 6.1M SF under development was pre-leased, with another 2.8M SF still available. Every new project in 2013 and 2014 was leased up before excavators hit the dirt.

Deal volume also fell short. During the last four quarters, volume totaled 5.8M SF, short of the long-term average of 7.5M SF.

Net absorption also is lackluster at 1.5M SF so far this year compared to 4.5M SF in all of 2015. The vacancy rate rose 60 basis points to 9.1% last quarter even with Class-A rates falling 160 basis points to 8.9%. Class-B and Class-C rates jumped by 1.5 basis points to 9.2%.

Several developments underway in the region will add several million square feet of office space, including 5.7M SF of office at Related Cos’ $6.5B 240-acre mixed-use project in Santa Clara. The project, which will be the largest private development in Silicon Valley according to Savills Studley, also boasts 1.1M SF of retail, 700 hotel rooms and over 1,300 apartments. The first phase of this development will start next year with 600k SF of office, a 300-room hotel and 50k SF of retail. The project is expected to be completed by 2022.

Find out more about Silicon Valley construction and development at Bisnow’s upcoming event in San Jose Dec. 7.