First quarter 2011 is in the books– my overview of the Peninsula Office market

| April 21, 2011 | 1 Comment

The Colliers 1Q 2011 Market report will be released shortly.  I’ve just finished my article covering the office market.  You can find the text below:

The San Francisco Peninsula commercial real estate market opened 2011 in dramatic fashion, with the biggest lease in recent memory kicking off the year, and several of other notable transactions driving the office vacancy rate down to its lowest point since the close of 2008.  Facebook’s million square foot relocation to Menlo Park is an unusual occurrence for a smaller market such as the Peninsula, but it is an indicator of the region’s continued importance to cutting-edge technology companies.

The office vacancy rate for San Mateo County dipped 230 basis points to 15.3 percent in the past quarter. The greater Peninsula (San Mateo County, Palo Alto, Mountain View and Los Altos) declined to 14.6 percent from the 16.2 percent figure that closed 2010.  While vacancies have tightened to varying degrees in all size ranges, the most noteworthy impact has been on larger blocks of space, where it seems likely that a limited supply may cause larger users to expand their searches beyond the Peninsula.

The biggest story for the local market remains the extraordinary conditions seen within submarkets in the south Peninsula, with social media and mobile app start-ups driving vacancies in downtown Palo Alto and Mountain View to historic lows.  The vacancy rates within these two downtown cores currently stand at 4.4 percent and 3.4 percent, respectively, and average asking rates have continued to show very strong growth.   Less dramatic but still pronounced improvement continues in other submarkets dominated by higher end properties, notably Redwood Shores and Foster City, both with vacancy rates below nine percent.

The most noteworthy characteristic of the recently depressed market was the exceptionally low levels of leasing activity.  Office gross absorption, a measure of all leasing activity in a marketplace, dipped below a half-million square feet on the Peninsula at the low point of this past cycle.  The first quarter of 2011 marked a dramatic turnaround on this front.  Even net of the somewhat anomalous Facebook lease, at over 1.5 million square feet, gross absorption hit its highest mark in nearly four years.   Based on current market activity, Colliers projects that the second quarter of 2011 will be another strong quarter for absorption.

Headline grabbing leases notwithstanding, the Peninsula continues to see a steady stream of sizable transactions, and 2011 opened with more than its share.  The County of San Mateo’s purchase of a vacant 207,896 square foot office project in San Carlos and DreamWorks 193,015 square foot lease in Redwood City played a significant role in the plunging vacancy rate and showed the continued appetite for Peninsula space by major users.

Despite the momentum in the marketplace, the very decisive recovery remains uneven and largely focused in higher end buildings and core locations.  While class ‘A’ office vacant square footage in San Mateo County dropped by nearly 16 percent last quarter, the improvement for class ‘B’ space was less than half this rate.    Year to date, San Francisco Peninsula net absorption stands at an impressive 480,400 square, representing only the third quarter of positive absorption since the beginning of 2008.

Based on the many factors, 2011 may bring a close to the tenant-favorable market conditions of the past few years.  Average asking rates for the County increased for the second consecutive quarter to $2.69 per square foot full service to $2.64 per square foot full service at the end of 2010.  The relatively modest increases to broader asking rates do not reflect changing conditions seen in certain segments, however, but it is likely that the broader market will show the impact more dramatically going forward.

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