State of the local commercial real estate market, mid-2012

| July 12, 2012 | 1 Comment

Colliers International will be releasing its 2Q 2012 Market Report for the SF Peninsula region in the next several days. My article on the Office market follows:

The San Francisco Peninsula and surrounding metro area continues its position at the lead of an improving national economy and commercial real estate market.    While the market, it seems, has taken a bit of a breather, with more moderate leasing activity in the first half of 2012 than in the same period a year ago,we are still very much in a generally tight market across the board.

By almost any measure, the commercial real estate market in 2Q 2012 was essentially flat on the SF Peninsula.   The office vacancy rate for the  Peninsula remained virtually unchanged this quarter, and sits mid-year at 11.41%.  For San Mateo County (which does not include the heavily impacted Palo Alto/Mountain View submarkets), a slightly higher rate of 12.46% will be found, also flat from the previous quarter.

For the second consecutive quarter, Net absorption for the Peninsula was negative, albeit only very slightly.  Lease rates appear to be responding to the slowdown in the pace of leasing, ending the quarter at an average of $3.49 for the Peninsula, only nominally higher than last quarter but a 17% gain from a year ago and a 25% increase from the beginning of this market cycle.

Gross absorption, a measure of all leasing activity in the market dropped from the prior period for the second consecutive quarter.  This is the first consequential sustained decline in leasing activity since late 2008, and the current quarter represents the lowest  Gross absorption since  Q4 2010.  A slowdown in activity from the heady levels seen last year surprises no one, and at least some of this moderated pace can be attributed to the shortage of large blocks of space, the impact of which is exaggerated in a small market like the SF Peninsula.

The largest leases that drove the aggressive market upswing in 2011 have become scarce at the midpoint of 2012, likely due at least in part to a lack of available inventory.   While last quarter saw the majority of office leasing activity (well over 60%) generated by transactions in excess of 20,000 sf, the current quarter only saw a fairly modest 255,000 square feet of ‘major’ leases, or 38% of San Mateo County’s total.    At first glance, this could be interpreted as a negative sign, but it likely represents the beginning of a broader recovery as small users become a bigger driver.    Noteworthy transactions for the second quarter of 2012 include SuccessFactor’s 87,067 sf lease at Centennial Towers, South San Francisco, LiveOps’  42,165 sf Redwood Shores commitment and Sonitus Medical’s 25,170 sf lease in San Mateo.

At present, sublease space makes up a relatively inconsequential part of the overall market, accounting for roughly 15% of available square footage.   There has, however, been an acceleration in sublease availabilities coming to market.    While any risk of volatility from a glut of sublease space seems distant at the moment, this is likely the greatest risk factor in the mid-term for the local market.

The San Francisco Peninsula market appears to have stabilized.   Secondary locations should continue to benefit from single digit vacancy rates in virtually every downtown core on the Peninsula, and the scarcity of large blocks of space will keep rents strong in business park locations.  Going forward, it seems likely, barring drastic economic changes or the influx of substantial sublease square footage to the market, that this steady state will continue.

 

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  1. Core downtown markets remain tight | Opinion of Value | July 12, 2012

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