Peninsula Market update, 3Q 2013

| October 14, 2013 | 0 Comments

IMG_3611We will be releasing our 3Q 2013 market report very shortly. My article on the state of the office market follows:

At the close of the third Quarter of 2013, the Peninsula commercial real estate market continues through an extended period of exceptional rent growth.  Not only are rents in the core downtowns at near historic levels, but notable rent growth and declining vacancy can be found even in the peripheral markets that arrived late to this market cycle.

The vacancy rate for the Greater Peninsula ended 3Q 2013 at 11.68%, a nominal improvement from the earlier quarter’s 11.83%.    For San Mateo County, which is more heavily affected by the slower North Peninsula submarkets,  the quarter closed with a similarly small improvement to 12.73% (down from 12.91% in the prior quarter).

Asking rates for office space in the local market continue to steadily increase, now at an average of $3.82 FS for the entire Greater Peninsula ($3.51 Fully Serviced for San Mateo County alone).  This marks the highest asking rate for office space on the Peninsula since the dot-com boom over a dozen years ago.   In exceptionally low vacancy submarkets, we are starting to see the lack of available space impact actually suppress rate growth, as inventory in higher-end and therefore costlier buildings all but completely vanish.

Gross Absorption, a measure of all leasing activity, also continues to show strong numbers– and perhaps even more than vacancy statistics may not offer a full reflection of the strength of the market.    The 1.165 million square feet of Gross Absorption recorded on the SF Peninsula in 3Q 2013 shows it as the most active period of leasing since the beginning of 2012.  Not a part of this figure are some significant transactions consummated by Google, including their 500,000 square foot lease of the former Mayfield Mall site in Mountain View (considered an R&D, not office property), one of the largest leases on the Peninsula in memory.

While leasing activity in Palo Alto and Mountain View was once again dominated by Google, noteworthy transactions were not limited to the south Peninsula.  Larger transactions to the north included Rocketfuel’s 104,000 square foot expansion into the Circle Star office project in San Carlos, King & Spaulding’s 26,000 square foot lease in Stanford Research Park, and AdapTV’s 27,000 square foot San Mateo lease.

The ongoing strength in the core downtown markets up and down the Peninsula, led by Palo Alto’s exceptionally low 1.58% downtown vacancy rate, has been well documented.  Given the near lack of available space in these pockets, it is not surprising to see substantial spillover into some of the competing high-end markets.   Redwood Shores, with a similarly multi-tenant building heavy inventory has seen vacancies dip to 5.4%.

With most submarkets in the region now showing single digit vacancies and exceptional rent growth over the past 3 years, it seems certain that even peripheral markets will continue to see the effects of a spillover from the heavily impacted core locations.  The aggressive competition now seen for quality spaces in the tightest markets will only increase and drive more tenant traffic to seek other options.

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