Silicon Valley Office Market
Given the leasing activity in the first half of the year, we might be at an inflection point in the office market. Net absorption was positive through the second quarter as the combination of sublease space and new construction that has been delivered to the market slowed. Despite the shrinking supply of sublease space, more direct available space came back on the market in the first half of 2024 pushing the overall vacancy rate up to 19.4% in the second quarter from 18.8% at year-end 2023. Asking rents in Silicon Valley rose to $5.10/SF full service in 2023 and have remained relatively steady at $5.12/SF full service so far in 2024. While full service asking rents are flat, concessions, including TIs and free rent, still play a big part in lease negotiations. In addition, as companies continue to look for ways to bring employees back to the office, amenities including flexible workspaces, more conference rooms, and up-to-date infrastructure also play a big role
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Silicon Valley R&D Market
An increase in both new construction as well as sublease space caused supply to outpace demand during the first half of the year. While the total vacancy rate tick up to 12.5% in the second half of 2024, an increase of 120 basis points from year-end 2023, it is still below its 20-year average of 14.3%. Asking rent gains in four of the area’s top R&D markets was just enough to keep overall marketwide gains positive. Overall, the asking rent rose 11.2% across all submarkets in Silicon Valley with Mountain View posted the largest gain of 6.2% to $4.61/SF NNN, the highest rate in the area. Sunnyvale also recorded healthy growth of 4.3% to $3.61/SF NNN. However, asking rents declined in Fremont and San Jose as tech tenants vacate large blocks of space in those submarket.
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The high levels of sublease and direct space on the market pushed the Silicon Valley combined industrial and warehouse vacancy rate up to 4.2% in the second quarter, up 40 bps from year-end 2023. Fortunately, this remains below the 20-year average of 6.3%. Only one building came online during the second quarter, a 126,700 SF warehouse building. Although most new construction is marketed as “manufacturing,” given the flexibility of warehouse tenants, they will likely continue to account for a large share in industrial leasing. Asking rates continue to rise with the overall vacancy rate at low levels. Asking rents increased by 10.2% from the same time as last year to $1.58 /SF NNN with rent growth the highest at 15.6% in the Santa Clara submarket. San Jose also posted a strong rent growth of 14.5% during the year.
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