Silicon Valley Office Market
The Silicon Valley office market showed continued signs of recovery in the first quarter of 2025, recording 106,772 SF of positive net absorption, the second consecutive quarter of growth following Q4’s positive 1.1 million SF. Overall vacancy remained relatively stable at 19.6%, a marginal increase from 19.5% in the previous quarter. Tenant demand also saw an increase, with active tenants in the market rising 14.0% since Q4 2024. Positive signs are emerging, as demand levels are up 32.9% year-over-year compared to Q1 2024, indicating sustained underlying interest. Asking rents increased to $5.15 per square foot full service in the first quarter of 2025, up 2.9% from the previous quarter, reflecting market adjustments to landlord pricing. Despite this increase, effective rents remain influenced by high concessions, such as free rent. Companies are increasingly prioritizing amenities like flexible workspaces, larger conference areas, ample natural light, and state-of-the-art infrastructure to encourage employees to return to the office.
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Silicon Valley R&D Market
Overall vacancy rose for the 10th consecutive quarter, though a divergence between direct and sublease availability emerged. Direct vacancy continued to trend upward, rising 5.2% from the previous quarter. In contrast, sublease availability declined by 1.4%, driven by minimal new subleasing activity. Much of the existing sublease space is transitioning to direct availability as leases expire. Despite the steady increase in vacancy over recent years, R&D vacancy remains below the long-term historical average of 14.3%. Rent growth in Santa Clara, San Jose, and Sunnyvale was not enough to offset marketwide declines, largely due to significant year-over-year rental rate decreases in Fremont. In the Fremont submarket, 15 buildings totaling 1.1 million square feet of multi-tenant space, primarily in the Bayside and Mission South submarkets, recorded quarter-over-quarter rent decreases. When comparing total available square footage to the space affected by these decreases, Fremont experienced a 43.1% rental rate decrease across its available inventory. Overall asking rates fell to $2.86 psf NNN, matching Q3 2023 levels, with the average asking rent down 2.3% year-over-year.
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The vacancy rate continued to rise, marking the sixth consecutive quarter of rising vacancy rates. Vacancy in the first quarter rose 57 basis points from the previous quarter and 233 basis points from the previous year. At 6.4%, first quarter vacancy has risen above the 20-year average of 5.8%. The first quarter closed on a high note with gross absorption for the quarter at 2,161,656 square feet, a 91.4% increase from the fourth quarter of 2024. Gross absorption in the first quarter was also 28.3% more that the 5-year average of 1,685,267 square feet.
While conditions in the overall economy and broader industrial market remain murky, asking rental rates continued to rise. The average asking rent as of the first quarter of 2025 increased 4.8% year-over-year from the first quarter of 2024 to $1.57 per square foot NNN. While asking rents are inching up, concessions, in the form of TIs and free rent, continue to be a large part of the lease negotiation so it is likely that effective rents are down to flat.