Silicon Valley Office Market
Strong leasing activity in the first and third quarters of this year, coupled with modest activity in the second quarter, signals that the market is recovering from previous lows. Net absorption was negative in the third quarter as the combination of vacant space increased and new construction was delivered to the market. Direct available space continues to be added to the market in the third quarter of 2024 pushing the overall vacancy rate up to 20.1% from 18.8% at year-end 2023. Asking rents in Silicon Valley have remained relatively steady at $5.05/SF full service in 2024. While full service asking rents are flat, concessions, including TIs and free rent, still play a big part in lease negotiations. In addition, as companies continue to look for ways to bring employees back to the office, amenities including flexible workspaces, more conference rooms, and up-to-date infrastructure also play a big role.
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Silicon Valley R&D Market
An increase in overall vacancy caused supply to outpace demand during the initial three quarters of the year. While the total vacancy rate tick up to 13.2% in the third quarter of 2024, an increase of 190 basis points from year-end 2023, it is still below its 20-year average of 14.5%. Asking rent gains in San Jose, Sunnyvale, and Morgan Hill R&D markets were not enough to keep overall marketwide gains positive for the quarter. Overall, the asking rent declined 0.77% across all submarkets in Silicon Valley with Fremont posting the largest loss of 6.0% to $2.35/SF NNN. San Jose recorded healthy growth of 3.2% to $2.57/SF NNN and Morgan Hill saw the largest gain for the quarter, achieving a growth of 21.1% to $1.61/SF NNN.
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The high levels of sublease and direct space on the market pushed the Silicon Valley combined industrial and warehouse vacancy rate up to 5.1% in the third quarter, up 120 bps from year-end 2023. Fortunately, this remains below the 20-year average of 6.0%. Only one building came online during the third quarter, a 212,684 square foot manufacturing facility. Overall market asking rents increased by 15.0% from the same time as last year to $1.58 /SF NNN with rent growth the highest at 30.0% in the Fremont submarket. San Jose also posted a strong rent growth of 16.2% during the year. 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 effect rents are down to flat.
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