Peninsula Market update, 1Q 2014

| April 15, 2014 | 0 Comments


IMG_3611Our 1Q 2014 market report is available HERE.

If you are a regular reader of our quarterly reports, you may notice some inconsistencies in the vacancy rate in a few submarkets– notably Palo Alto where, by our reports, the vacancy rate took a nose dive in the past 3 months.  This is due to a very detailed audit of the Building Base by our excellent research staff– the new lower rate is a result of that audit, not a big market event (in fact, the vacancy rate ticked up a tiny bit in Palo Alto this quarter).

My article on the Office market follows:

After a very solid year of marked across the board improvement and absolute frenetic activity in the high demand core locations, the SF Peninsula commercial real estate market kicked off 2014 at a more measured pace.

The vacancy rate for the San Francisco Peninsula has leveled off somewhat after the extraordinary improvements of the past year, and currently stands at 9.76%.   Available square footage is slightly higher than at the close of 2013 after the first quarter of negative net absorption in a year.  San Mateo County also saw a nominal increase in the amount of available space, and the vacancy rate there is now 11.28%.

Gross absorption, a measure of all leasing activity in a market area, remained brisk this quarter, but was down slightly on the Peninsula, totaling 1,255,792 square feet for the quarter.  While this is slightly below the past two quarter’s total, it is within the average range seen in the past two years.   San Mateo County’s total of 779,255 square feet was similarly off from the past few quarters’ activity, but well within recent averages.

Rents can be a trailing indicator for the strength of a market, but it is not clear whether the flattening of asking rates on the Peninsula over the past few quarters signals a slowdown.   The current Average asking rate of $3.90 Full Service on the Peninsula is the highest since the dot-com days, but the rate of growth has slowed, with two quarters of no growth followed by the most recent quarters 2% uptick.  Given the growing scarcity of available higher-end leasing opportunities, it is not unreasonable to think that rent growth is actually constrained by the strength of the market.

Once again, the Peninsula was buoyed by the disproportionately strong performance within a few small submarkets, as users continue to demand immediate access to the rail lines.  In the first Quarter of 2014, over 50,000 square feet of net absorption was concentrated in the downtown cores of Palo Alto and Redwood City– two relatively small submarkets.    Only a drop in the bucket compared to overall market activity in the region, but a further indicator of just how focused tenant demand remains on these amenity heavy locations.   The vacancy rates in both these downtowns continue to plummet, and the new dynamic of user demand so drastically driven to these locations has become deeply entrenched.

Outside of some of the most active core submarkets, larger transactions were in short supply in the 1st quarter of 2014.   A notable exception was Gilead Science’s 109,000 square foot lease in Foster City, the largest office transaction there in 5 years.  Other major transactions of the quarter include Morgan Lewis’s 55,000 square foot lease at Palo Alto Square, Coupa Software 26,000 square foot San Mateo lease at The Crossroads, and Pure Storage’s 22,500 square foot lease in downtown Mountain View.

Even if we are witnessing a bit of a cooling market, at least in the more suburban parts of San Mateo County, the near term prospects look quite solid.   The volume of new availabilities coming to market remains low, and sublease space is in very short supply (with the notable exception of downtown Mountain View, where several large blocks of sublease space are currently seeing strong activity).   Potentially volatile sublease inventory, in fact, currently comprises less than 15% of the total available square footage on the SF Peninsula, an extraordinarily low figure not seen in over a decade. We anticipate that the heavily bifurcated market will even out over the course of the next several quarters, with users forced to broaden their search parameters past the deeply oversubscribed core locations.

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