1Q 2012 update on the SF Peninsula Commercial Real Estate Market

| April 15, 2012 | 0 Comments

We will be releasing our Market Report for 1Q 2012 shortly.  My article on the Office Market follows:

It would not be realistic to expect the San Francisco Peninsula commercial real estate market to open 2012 at the same fevered pace seen during the prior year.  The local market – very much in keeping with the national picture – has seen some modest slowdown in activity to start off 2012.  But in a region sporting one of the lowest unemployment rates in the nation, continued solid Venture Capital investment, and some signs of significant leasing by individual companies that clearly anticipate dramatic growth, prospects for continued strengthening of the local market appear positive.

The office vacancy rate for the San Francisco Peninsula closed the first quarter of 2012 at 11.75%, a slight increase from the prior quarter, but notably stronger than the 14.54% seen at this time last year.  Similarly, the vacancy rate for San Mateo County is currently 12.50%, essentially unchanged from the prior quarter but markedly stronger than the 15.24% of a year ago.  Despite an at least momentary leveling in the vacancy rate, average asking rates continue their climb, reaching $3.46 PSF this quarter, their highest since late 2008.

For the first time since late 2010, the San Francisco Peninsula office market added more square footage to the available inventory than it absorbed.  Net Absorption for the quarter was a modestly negative 71,735 square feet, with the bulk of the imbalance caused by 96,050 of negative absorption in Palo Alto.  Several other submarkets did, however, also show negative net absorption.  Perhaps more noteworthy is the dip in Gross Absorption, a measure of all leasing activity in a market area.  The Gross Absorption total of 1.33 million square feet is the lowest on the SF Peninsula since the close of 2010, and is below the averages seen in the last strong market cycle of ’06-07.   While a portion of this drop can certainly be attributed to the near total lack of very large blocks of space in the local market that could potentially be leased, it is worth noting that the robust market recovery to date has been driven largely by only two strong quarters of absorption.

Big deals were the most noteworthy component of the 2011 market boom, and that trend may be continuing.  While there may be fewer large ‘campus’ users active on the Peninsula than at this time last year (and little space to satisfy them even if there were), over 60% of the leasing activity in San Mateo County this past quarter was generated by transactions of over 20,000 square feet- a significantly higher proportion than the prior three quarters.   Transactions of note on the Peninsula in the first quarter of 2012 included Evernote’s expansion into 85,891 square feet in Redwood City, Nuance’s 68,554 sf downtown Mountain View build to suit, and Heartflow’s 102,981 sf lease in Pacific Shores, Redwood City

While rents in the benchmark downtown Palo Alto market appear to have topped out, remaining virtually flat since mid 2011, other submarkets bearing similar in-demand amenities and transit access have continued to strengthen.  Downtown Redwood City (despite a modest spike in vacancy this quarter) has seen Average Asking Rates rise to $3.29 PSF, an increase of nearly 25% since mid-2011.  Downtown San Mateo has also seen steady improvement, with rents there now topping $3.00 PSFsome of segments

The San Francisco Peninsula Office market appears to be very much still in a pronounced upswing, but rents for  some segments may have already stabilized, and even if activity does wane some this year in comparison to 2011, there is little reason as yet to expect any significant ramifications.  We expect to see continued growth, at perhaps a more subdued pace than last year, over the course of 2012.

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