Asking rents have flattened
AUGUST 30, 2023 – Silicon Valley’s commercial space indicators reveal in the second quarter of 2023 that many companies are continuing to adjust to new expectations around a remote and hybrid work culture. The latest analysis from Joint Venture Silicon Valley’s Institute for Regional Studies, in partnership with JLL Silicon Valley, in their second-quarter Silicon Valley Commercial Space report, published today, showed a weakening attitude toward the market in the first half of 2023 as a barrage of layoff announcements enveloped the technology industry.
Institute analysis shows that many companies have implemented return-to-work mandates, with hybrid office policies becoming the norm and that a certain percentage of companies will no longer be interested in leasing space if their business operations can be virtual.
“Reduced demand for office space that’s driven by work from home trends and a more efficient usage of space have kept vacancy levels elevated,” noted Ricky Manago, Affiliated Researcher for the Silicon Valley Institute for Regional Studies, the research arm of Joint Venture Silicon Valley. “This is just as we are seeing mounting layoffs from tech firms.”
Total leasing volume in Q2 2023 was markedly low, particularly for larger office spaces above 100,000 square feet, as most companies shed headcount. The ability for employees to work from home has also undermined the urgency to provide seats.
The amount of construction completions in Q2 2023 has been moderate, with several of the most notable completions being part of long-term campus expansions for Intuit and Google (YouTube). There is still a healthy pipeline of construction deliveries expected through the year, with Google’s Caribbean project totaling more than one million square feet slated for completion next quarter.
However, market conditions continue to mire the progress of commercial developments, as mega-projects such as Related Santa Clara and Platform 16 have unclear timelines for completion.
“Despite achieving average leasing activity in Q2 2023, the market has softened considerably as big tech chooses to tighten its belt and reduce its overall inventory. This is not a reflection of the overall economic health of Silicon Valley which has recovered much of its market cap losses experienced in 2022 but more a reflection of shift in workplace strategy,” said Alexander Quinn, Director of Research at JLL Northern California. “However, there’s recent data that suggests innovation loss and slower staff development of recent hires have pushed employers to reconsider their remote-friendly policies. This is especially important in innovation centers where the urgency of building the right IP takes precedence over commercial real estate costs.”
Key findings:
- Silicon Valley’s Q2 2023 commercial space completions totaled approximately 900,000 square feet — approximately half of Q1 totals.
- Of the Silicon Valley commercial construction underway in Q2 2023, the largest share (43%) was Office, 35% was Lab, 16% Industrial, and the remaining 1% was Flex/R&D.
- Commercial leasing activity in Silicon Valley has been noticeably weaker through the first half of 2023 – on pace to fall 20% below the prior two-year average of 24 million square feet of leased space.
- The number of commercial space leases has returned to a more moderate level this year, as we observed a record setting total number of leases in 2022.
- There were 528 commercial lease transactions in Silicon Valley in the first half of 2023 (59% lower than the annual total of 1,276 in 2022, and 40% below the 882 in 2021).
- Silicon Valley office space vacancy rates continue to rise through Q2 2023 (to 18.0%), growing by two percentage points quarter-over-quarter.
- Q2 2023 vacancy rates were 18.0% for Office, 13.0% for Lab, 9.4% for Flex/R&D, and 3.5% for industrial space.
- Lab space vacancy rates experienced the largest increase among all commercial space types, averaging +7.7% above 2022 rates.
- Silicon Valley office space vacancy rates at locations within a 10-minute walk from public transit rose significantly during the pandemic then briefly trended downward.
- Vacancy rates for spaces near transit have since continued to rise, reaching 25% at the end of 2022. In the first half of 2023, they declined by more than three percentage points (to 21.6% at the end of June).
- Average rental rates appear to have plateaued for all commercial space types, none of which changed by more than a single percentage point during the second quarter of 2023.
- Silicon Valley Office rents have fluctuated since prior to the pandemic at locations near and not near to transit. Asking rents were 56% higher near transit in Q2 2023 than not near transit.
- A total of 6.3 million square feet of new commercial office space was under construction throughout Silicon Valley in Q2 2023.
For further reference
To access Silicon Valley’s online data hub, visit www.siliconvalleyindicators.org.
About Joint Venture Silicon Valley
Established in 1993, Joint Venture Silicon Valley is a platform for analysis and action, created and supported by the major sectors (business, government, labor, academia). The analysis emanates from the organization’s research arm, the Silicon Valley Institute for Regional Studies. The Institute catalyzes action by spotlighting issues, convening the region’s leaders, and facilitating a process for collaborative action. For more information, visit www.jointventure.org.
About JLL
JLL is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. www.jll.com/silicon-valley.
