Further Tightening in Office Market Defies National Trends

Throughout this somewhat uncommon 2020, Silicon Valley has continued to demonstrate strength and resiliency in the commercial office space market. Rising occupancy levels continued in the 2nd quarter, and as demand continued to outstrip the growth in supply, according to CoStar. Seattle is the only major metro area in the US that has lower availability.

If we assume that any recessions resulting from COVID pandemic remains short, the fundamentals for the Bay area appear headed for only a slight softening, says CoStar analyst Jesse Gundersheim. The job loss picture across the nation as a whole is catastrophic, but the Silicon Valley market has seen fewer job losses, comparatively, than other metros in California and the US.

San Jose took a short hiatus in new office development over the last few years, causing office vacancy levels to decrease as tech companies competed for room to expand. That trend seems to be easing somewhat, with nearly 8 million square feet of office space in various stages of construction. Most of which is pre-leased already, with appetite for more. San Jose continues to rank among the most active commercial markets in the US, with nearly 6% of current inventory still in development.

Despite the strong fundamentals, developers are hitting the pause button as continued uncertainty weakens future leasing prospects. CoStar reports that Boston Properties “suspended investment in projects with material lease-up risk, including Platform 16”, a downtown San Jose office project along the Guadalupe River that spans 1.1 million square feet.

Fading market velocity is the cause for concern, despite fundamental strength. The challenges faced by businesses in the wake of the pandemic, and the uncertainty of how long it will take to return the economy to full-steam has resulted in some hesitancy among business leaders to commit to major moves and long-term leases. According to CoStar, “leasing volume contracted 60% from last year’s (2019) second quarter.” Many employers are allowing leases to expire as larger numbers of workers continue to telecommute, in order to reduce costs.

Indeed, the “mobile workforce” may be the biggest risk to future Silicon Valley commercial fundamentals. There has never been a strong impetus before now for employers to experiment with a large-scale remote workforce. The success of these ventures could cause major Silicon Valley employers, particularly tech giants, to re-imagine their workspace and office needs. Only time will tell if the trends in telecommuting will outlive the pandemic-driven need.

Keystone Commercial Brokerage serves the needs of commercial real estate investors in the Santa Clara and San Mateo counties, specializing in land, multi-family, office, and industrial property. Paul Phangureh has over 18 years of experience in buying and selling in the Santa Clara and San Mateo County areas. Contact Paul at 650-924-2544, or email at paul@keystonebrokerage.com

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