Mid Year Market Update

| July 22, 2010 | 1 Comment

 

 I’ve recently finished writing the narrative for Colliers’ 2Q ’10 report for the Peninsula.  The full report should be released within a few days.  

What I find most interesting about the current market is the inconsistency.  This is the most drastically bifurcated market that I have seen in my long career.  Consider these little snippets:

– My downtown Mtn View index (tracking vacancy in major office buildings in the core downtown area) stands at 4.48%, roughly half the vacancy seen as recently as December.  Now, there are a few big vacancies in the pipeline that will send the index up, probably dramatically, but this incredibly tight submarket is a fantastic indicator of exactly where the action is.  Small, multi-tenant space in amenity-heavy, transit friendly locations is just not readily available anywhere on the Peninsula  (And, incidentally, I don’t expect the pending vacancies to change the availability in the small-space market much.  No impact on rents). 

– Lease activity in nearby secondary markets– small space that normally directly competes with these core locations– is at a standstill.  Rents are down and vacancies popping.  We’re seeing some larger tenants fleeing for even more cost-effective blocks of R&D space, leaving behind low-cost multi-tenant friendly square footage that is normally relatively easy to re-tenant.  Normally, but not today.

– A good reminder to look past the stats:  Due to the newly available 900,000 sf Roche campus, the R&D vacancy rate in Palo Alto tripled last quarter (a good example of why I’m not a big fan of city-by-city statistics, and why I like working with my own models like the above referenced downtown Mtn View index) to its highest rate in quite some time.  The Stanford Research Park has in reality become one of the most dynamic submarkets in the region over the past year, with the likes of Facebook, Skype, Tesla, etc absorbing big blocks of space.  With nearby Shoreline Park already enjoying low vacancies, look for upward pressure on rents on the South Peninsula, at least in certain pockets.  At the same time, most submarkets are still logging increases– some substantial– in R&D vacancies.

This isn’t just a typical ‘flight to quality’ scenario– we aren’t looking at opportunistic relocations to get a little more image bang for the buck.  We are seeing rents in successful markets hold their own- even grow- while second tier markets erode.  I am pretty certain that there is a limit to how big a spread between Class A and Class B rents the market will tolerate before there is a correction.  My guess is that we’ll see Class B rents stabilize, maybe even before dropping vacany rates would normally justify a move

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