2009 in the Rear View Mirror

| January 14, 2010 | 0 Comments

While working on my write up for our Peninsula market report, I’ve been digging through our year-end stats for the Office market in San Mateo County. They are, quite frankly, pretty dull. We show a quarter where the vacancy rate for the county wiggled in a statistically insignificant range, with modest negative net absorption. One big block of space hitting the market tips the balance slightly to the negative, and vacancy in the county remains at just below 20%. Given the shocking speed that the market degraded starting 3Q of ’08, a dull quarter suits me just fine. Incorporating stats for Palo Alto and Mtn View, the entire Peninsula shows a modest drop in vacancy, largely thanks to the Facebook deal in Palo Alto. By any measure, a flat market.

So, over the course of 2009 we’ve gone from a leasing market at an absolute standstill and vacancies rising at the fastest rate I’ve seen since 2001, to a flat market –far (maybe very far) from a full recovery, but, at least for the moment, stable. Not bad.

I’ll cover this more in our yearend report, but I think that the fairly fast semi-stabilization of the market was pretty predictable. As I’ve written previously, unlike in the last market downturn, sublease space has really not been much of a factor, which has kept a big source of potential volatility out of the mix. Rents have tracked down, but slowly, and we’ve seen few jaw-dropping cheap deals, particularly in the Class A office world. If anything, there have been a few notable deals that have been surprising in the other direction.

There was a very real shortage of class A space on the Peninsula that played a big role in the crazy rent run-up a few years back. A big increase in vacancy doesn’t change the fact that there is a limited building base for top-flight product between Mtn View and Foster City. Small markets can change in a big hurry.

Now, I think that we’re likely to see lease rates pull back a bit further- maybe not so much for small multi-tenant oriented office buildings, but almost certainly for larger R&D buildings. But keep an eye on the Class A market on the Peninsula—it may outperform expectations this year

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