Peninsula Market update, 4Q 2013

| January 9, 2014 | 0 Comments

203 Redwood Shores ParkwayOur 4Q 2013 market report will be released very shortly. My article on the state of the Office market follows:

By any measure, 2013 was a great year for the SF Peninsula commercial real estate market. A substantial drop in the vacancy rate, coupled with steady rent growth and solid absorption has led to increased development and investment activity, particularly in the downtown cores up and down the Peninsula.

The Vacancy Rate for the Greater Peninsula closed 2014 at 10.56%, the lowest figure seen in this market since the tail-end of the last market cycle, at the beginning of 2008. While lacking the benefit of the most active local market, San Mateo County also finished the year with a stronger market and an 11.37% vacancy rate. Total available inventory has dropped by roughly one million square feet since this time a year ago.

Gross Absorption, a measure of all leasing activity in a market area, was equally impressive for 2013. The 4th quarter total of 1.538 Million square feet of leasing activity marks the fifth consecutive quarter of growth and the best performance since the 4th quarter of 2011. More significant is the total absorption for 2013 of 4.89 Million square feet—far short of 2011’s anomalous 7.3M square foot total, but well ahead of historic averages. The 3.4 Million square feet of absorption in San Mateo County alone shows solid growth over 2012, but is more in line with long-term expectations.

Average asking rates for the Greater Peninsula continue to increase, up 8% from a year ago to their current level of $3.84 Fully Serviced Per square foot—the highest rate since the dot-com boom. This increase has been largely fueled, though, by the spike in rents in South Peninsula cities of Mountain View and Palo Alto. Rents for San Mateo County have risen a more modest 5% this year (almost entirely in the first quarter) to their current $3.49 Fully Serviced per square foot. Because the vacancy rate for Class A space in the County has dropped more precipitously than that for older space, it is likely that broader rent growth is to some degree artificially suppressed.

While the entire Peninsula has enjoyed a rapidly improving market over the course of 2013, the core rail-served downtown submarkets continue to dramatically outpace the region. New construction dominates the landscape in the downtown areas of Mountain View, Palo Alto and particularly Redwood City with the groundbreaking of the 300,000 square foot Crossing/900 development. Downtown Palo Alto continues to lead the market, and Colliers International anticipates vacancies there will dip below 1% in the first quarter of this year.

While the strongest quarter of 2013 for Gross Absorption did not feature a great number of larger transactions, several did stand out. Significant transaction included YouTube’s 95,000 square foot San Bruno expansion (particularly significant in the slower North County submarket), Morgan Lewis’s 60,000 square foot lease in the planned Stanford Research Park building at 1400 Page Mill, and Pearl Therapeutics 40,000 sf lease in Redwood City.

With vacancies still at levels heavily favoring building owners and levels of sublease space very much in check, rents should at worst stabilize but quite likely increase going forward. Levels of activity in older buildings and more remote locations over the next several quarters will give a good indicator of the long-term direction of the market.

Tags: , , ,

Category: Uncategorized

About the Author ()

Leave a Reply

Your email address will not be published. Required fields are marked *