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Institute Report: Year-to-date leasing activity 46% of last year's total

Silicon Valley Commercial Space Q3 2020 cover Unprecedented 18+ million square feet of space still under development

October 26, 2020 – With no end to the pandemic in sight, Silicon Valley companies remain in a holding pattern. Construction delays were the earliest and most pronounced impacts of the pandemic and yet an unprecedented amount of commercial space remains under development. This is according to 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.

Also due to the pandemic, office vacancy rates near transit have increased significantly due to the workforce remaining predominantly remote, plus an extremely low utilization of public transit. At the same time, asking rents near transit remained steady into Q3, around 80 percent higher than other locations.

“Right now our region is riding the momentum of the past couple years, continuing to churn out a significant amount of new commercial space,” noted Rachel Massaro, the Institute’s Director of Research. “The pace will likely continue until what’s in-progress gets completed. After that, it’ll depend heavily on what the post-pandemic new normal looks like. It’s interesting to note, though, that the need for lab and other specialty spaces will likely persist regardless of whether our workforce remains predominantly remote.”

Key Findings

  • Commercial space continues to be delivered to the Silicon Valley market, with completions totaling 1.44 million square feet (74 percent Office in San Jose and Mountain View, 26 percent Flex/R&D in Sunnyvale and Palo Alto), and a 2020 year-to-date total of 3.59 million square feet. The latter represents around two-thirds of what was completed in the first three quarters of the prior year, and 31 percent of the 2019 total. An additional 1.37 million square feet of commercial space is slated for completion in the fourth quarter.
  • A significant amount (more than 18 million square feet) of commercial space remains in progress in Silicon Valley, despite pandemic-related construction delays. These projects include four buildings slated for Facebook in Burlingame and Google’s ‘canopied’ Charleston East addition. Of the 18 million square feet, 1.4 million is expected to be completed in Q4 including several in Sunnyvale. In contrast, several projects (e.g., Related Santa Clara’s 9.2 million-square-foot mixed-use development near Levi’s Stadium) have been put on hold, and others are taking longer than expected to complete.
  • A large share of the development in progress (60 percent) is Office. This space may be difficult to fill once completed if leasing activity remains depressed for an extended period of time, thus affecting regional vacancy rates.
  • Leasing activity has slowed as a result of the pandemic by as much as 70% (for Office), with Q1-3 leasing activity 46 percent below last year’s total in terms of square footage and 64 percent below by total number of lease transactions. Renewals are continuing to represent a smaller share of leased office and lab space – a trend that has been observed since 2018. The largest lease executed in Q3 was the 250,000 square-foot, 13-year Guardant Health sublease at Stanford Research Park.
  • Silicon Valley office space vacancy rates rose in Q2 and continued into Q3 reaching 10.7 percent, likely as a result of pandemic-related telework and uncertainty. While this represents an increase from last year, commercial vacancy rates are still significantly lower than the Great Recession highs in 2010. Increased Office vacancy in Q3 was partly due to Genentech vacating space in South San Francisco, plus a handful of other smaller companies leaving their spaces.
  • Office vacancy rates near transit have increased significantly due to the workforce remaining predominantly remote, plus extremely low utilization of public transit. Asking rents near transit remain 80 percent higher than other locations.
  • Industrial space vacancy rates remain relatively stable, with declines tempered by pandemic-related increases in e-commerce – the average across all three quarters (5.4%) is 1.7 percentage points above the 2019 This is likely a result of the delivery of a substantial amount of Industrial space delivered to the market in the second half of 2019 and the first quarter of 2020.
  • Landlords have not significantly dropped asking rates. Rental rates have remained relatively stable for office, industrial, and laboratory space, and have declined by 17 percent since Q1 for R&D. Rental rates for laboratory space remain nearly double the cost of other R&D. Office space rental rates remain lower than in New York City, but higher than those in places like Austin, Seattle, Portland, and Denver.
  • Most commercial developments continue to be pre-leased. Five out of six notable Q3 completions were preleased, including to Google in Mountain View, VMware at Stanford Research Park, Roku in San Jose, and WePay in Palo Alto. Of the 15 million square feet of new commercial office space under construction throughout the Bay Area in Q3 68 percent has been preleased, primarily (91%) to tech companies.

Regarding the region’s longer-term real estate outlook, Ricky Manago, JLL Research Analyst, noted, “Google’s major redevelopment plans in Mountain View are a good indication of their long-term commitment to office space in Silicon Valley. Even so, much is still up in the air regarding how remote work will be handled in the future by our region’s tech giants and others. It also remains unclear what will happen to leasing velocity upon re-opening, and how much the injection of newly constructed office space will impact market dynamics.”

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For further reference

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About the Silicon Valley Institute for Regional Studies

The Silicon Valley Institute for Regional Studies is the research arm of Joint Venture Silicon Valley, and is housed within the organization. The Institute provides research and analysis on a host of issues facing Silicon Valley’s economy and society. For more information, visit www.siliconvalleyindicators.org.

About Joint Venture Silicon Valley

Established in 1993, Joint Venture provides analysis and action on issues affecting the Silicon Valley economy and quality of life. The organization brings together established and emerging leaders—from business, government, academia, labor and the broader community—to spotlight issues, launch projects and work toward innovative solutions. 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. For further information, visit www.jll.com/silicon-valley.

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