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Silicon Valley Office Rents Increase While Sublease Space Doubles

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Silicon Valley posted another increase in office rents during the second quarter, but an increase in sublease space and signs of the market softening could threaten continued rental increases.

Downtown San Jose
Downtown San Jose

Deal volume increased by about 50% during the quarter and tenants have leased 4.5M SF within the last four quarters, according to a recent report from Savills Studley. Rents rose 5.7% during the quarter to $4.19/SF. Class-A rent rose 9.3% to $4.25/SF. Sublease space reached 6M SF by midyear 2017 compared to 3M SF midyear 2016.

Overall availability remained unchanged and stands at about 15.7% throughout the region. Class-A vacancy increased 150 basis points to 21.1%. Class-B and Class-C availability declined 80 basis points to 13.1%. Much of the vacancy was at Santa Clara’s Great America office corridor. Santa Clara’s vacancy was 21.6%, the second-highest vacancy after North San Jose’s 29.8% vacancy level.

Large developments in Santa Clara are struggling to fill space. Irvine Co.'s Coronado Park near Santa Clara Square gained its first lease during the quarter with Duarte moving into 25K SF. Duarte is moving from another Irvine Co. property in Sunnyvale. Irvine Co.'s nearby office campus The Campus has had better traction and has nearly leased up three of its 220K SF buildings. A second phase will add 1M SF within five buildings.

Significant office space also is in the works throughout the Valley with about 11M SF under construction during the quarter, according to a report from the Silicon Valley Institute for Regional Studies and JLL. Demand is starting to wane — large acquisitions and consolidation within the semiconductor and information technology networking industries is leading to large vacancies.

Tech companies like Cisco, BlueCoat, Avnet and Ericsson have subleased or plan to vacate offices. Cisco laid off 1,100 employees and is planning to vacate its Milpitas campus. Avnet, which laid off 84 people, is shifting its volume manufacturing from San Jose to Chandler, Arizona.

Mid-stage and late-stage firms unable to raise funds are holding back from expansions. Mid-stage companies are having trouble raising B and C rounds while late-stage firms are taking on debt from private equity rather than endure a down round. They also are not issuing IPOs. Investors offered $16.5B to 1,797 startups during the first quarter compared to $18.7B to 2,366 startups in Q1 2016.

Tech Giants Still Expanding 

Meanwhile, Google, Amazon, Apple and Facebook are pushing forward on major leases, purchases or future ground-up developments in the region. Google’s plans to build a mixed-use community to accommodate 15,000 to 20,000 employees has sparked several deals and developments in downtown San Jose

Silicon Valley Office Rents Increase While Sublease Space Doubles
Rendering of Menlo Gateway, which will include Hotel Nia

Amazon signed a lease for 214K SF at 2100 University Ave. in Menlo Park, the largest lease of the quarter. Facebook will move into 200K SF in Menlo Gateway and is possibly completing a lease for about 500K SF for the second phase of the project expected to deliver late 2019.

Unlike previous quarters' extremely high rents, the second quarter provided more balance in high-demand areas like Mountain View and Palo Alto. A 10K SF office or full floor was a hot item a year ago, but now 49 full-floor spaces of 10K SF or more are available in Mountain View. Landlords are not decreasing rents, instead offering more concessions to creditworthy tenants willing to sign long-term leases.

With the high rental prices in Palo Alto and Mountain View, tenants have turned to Sunnyvale, Menlo Park, North San Jose, San Mateo or East Bay, where rents have been more affordable.

Companies with big hiring plans are preferring sites near housing as well as sites near Caltrain and BART stations. Activity around the San Jose BART extension may heat up once the Valley Transportation Authority auctions land above and around the station, according to Savills Studley. The Caltrain and BART extension near Diridon station is expected to bring 140,000 riders into Downtown San Jose daily.

Find out more about the future of Silicon Valley office at Bisnow’s Silicon Valley State of the Market event Sept. 13.