2023 News Releases

Rapid rise in Q3 Silicon Valley vacancy rates

Competition For Tenants Becomes Fierce

December 5, 2023 – Silicon Valley’s commercial space indicators reveal in the third quarter of 2023 that demand for Silicon Valley commercial space has been relatively weak, leading to a rapid rise in vacancy rates over the past year.

The latest analysis from Joint Venture Silicon Valley’s Institute for Regional Studies, in partnership with JLL Silicon Valley, in their third-quarter Silicon Valley Commercial Space report, published today, showed that competition for tenants between landlords (and sublessors) has become even more fierce as a result.

“The remote-friendly tech worker environment has changed the math on how much space companies need and what they will need in the future,” said Alexander Quinn, Director of Research at JLL Northern California. “Furthermore, the perception of office scarcity does not exist and therefore we will see more leasing as you grow rather than ‘demonstrating a path to growth’.

Institute analysis shows that total leasing volume through Q3 2023 exhibited a continued reduction in average space sizes. Large technology companies such as Google and Apple are shying away from signing major leases in recent years.

“There were just 781 commercial lease transactions through the third quarter which was 39% lower than the annual total in 2022,”noted Ricky Manago, Affiliated Researcher for the Silicon Valley Institute for Regional Studies, the research arm of Joint Venture Silicon Valley.

Newly completed commercial construction totals will likely surpass last year’s figures by the end of 2023. In contrast, higher interest rates and weakened demand for office and lab space have resulted in more restrained construction lending and a slowdown of new construction starts. Newly constructed buildings delivered without an occupier onboard are adding to rising vacancy rates, putting pressure on the entire market.

A muted demand for space has led to a leveling of asking rents, which have not kept pace with inflation. This trend may continue as high vacancy rates, sublease space availability, and slowing construction starts place downward pressure on pricing. Despite this, rents historically observe a significant amount of price stickiness, and the market is more likely to see a rise in concessions such as tenant improvement allowances and free rent periods. 

“Ultimately, we are learning the importance of in-person collaboration, training, and creation, and that will mean occupancy will continue to rebound,” opined Quinn. “However, the way we use office space has changed and by any measure we expect office users to become increasing more efficient where not all staff will need their personal space.”

Key Findings

  • Silicon Valley’s Q3 2023 commercial space completions totaled approximately 1.6 million square feet, almost double the total of the prior quarter.
  • Only 3% of the 1.6 million square feet of newly completed commercial space completed in Q3 was pre-leased.
  • A total of 4.47 million square feet of commercial space was completed through Q3 2023, with an additional 1.93 million square feet slated for completion by the end of the year.
  • Of the Silicon Valley commercial construction underway in Q3 2023, the largest share (40%) is Lab, 37% is Office, 16% Industrial, and the remaining 6% Flex/R&D. 
  • Commercial leasing activity continues to lag and may be on pace to end the year with the second-lowest leasing volumes since 2017.
  • Commercial leasing in Santa Clara County through Q3 amounted to 64% of last year’s annual total, San Mateo County leasing was lower at 52% of the prior year total by square footage.
  • There were 781 commercial lease transactions through Q3 2023 (39% lower than the annual total of 1,276 in 2022, and 12% below the total of 882 in 2021). 
  • The largest commercial space leases executed in Q3 were primarily for Industrial and R&D space
  • Silicon Valley office space vacancy rates continued to rise through Q3 2023 (to 19.6%), growing by another one and a half percentage points quarter-over-quarter.
  • Silicon Valley’s commercial office space vacancy rate (19.6%) is higher than in New York City (16.5%) and Washington D.C. (19.1%), but below that of San Francisco (30.4%), Austin (21.3%), and Boston (19.8%)
  • Q3 2023 vacancy rates were 19.6% for Office, 15.2% for Lab, 10.1% for Flex/R&D, and 4.0% for industrial space. 
  • Lab space vacancy rates experienced the largest increase among all commercial space types, averaging +9.0% above 2022 rates.
  • Vacancy rates within a 10-minute walk from public transit have continued to rise, reaching 25% at the end of 2022. Third-quarter office space asking rents were 55% higher at locations near transit.
  • Average rental rates appear to have plateaued for all Silicon Valley commercial space types, none of which changed by more than a single percentage point during the third quarter of 2023.

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About Joint Venture Silicon Valley

Established in 1993, Joint Venture Silicon Valley is a platform for analysis 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.

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