Large Block Tech Space is Scarce in San Mateo

SAN MATEO, CA—San Mateo is in the midst of a supply-demand conundrum. With a modicum of large block office space (100,000 square feet-plus) to attract tech tenants, availability is nonetheless ratcheting up ever so slightly in mid-Peninsula cities.

Guidewire Software inked the only large block lease so far this year in January when it committed to take all of Station 2, a 189,000-square-foot building now under construction in the Bay Meadows development. Such is the demand among large tenants for space in San Mateo—especially close to Caltrain or BART—that Bay Meadows developers revised plans for the last two buildings and are seeking to add almost 167,000 square feet to the planned +/-200,000 square feet. However, if approved, this space would not be completed until 2020.

One building that was fully vacant upon sale was the 63,050-square-foot building six in Peninsula Office Park. Hudson Pacific sold the building in January of this year for a total of $22.5 million before prorations, credits and closing costs.

The remaining six buildings of Peninsula Office Park were recently sold for $210 million before credits, prorations and closing costs. These buildings total 447,739 square feet and were 83% occupied as of the end of the first quarter.

GlobeSt.com learns that Peninsula Office Park was Hudson Pacific Properties’ only asset in San Mateo, and from a product quality and location standpoint, it was not on par with the rest of its portfolio. Hudson felt the timing was right to capitalize on strong market fundamentals in San Mateo and the Peninsula, as well as the numerous and well-capitalized buyers in that marketplace.

Leasing activity on the mid-Peninsula was dominated by renewals during the second quarter. This, combined with minimal outward migration by tenants, is keeping market fundamentals stable, according to a recent report by JLL.

Large block space is limited to the central and north county markets so large users are expected to migrate there in the future. Total vacancy (12.7%) is projected to tick down through the balance of the year while rents ($5.40 per square foot) are likely to remain stable.

“The San Mateo office market is in the midst of a supply-demand dilemma,” Ricky Manago of JLL’s Silicon Valley research team, tells GlobeSt.com. “While overall vacancy ticked up to 16% in the first half (from 14.5% at the end of 2017), there is very little large block space to attract big tech tenants.”

Meanwhile, average rents have increased 1.2% from last year which has squeezed some midsize and smaller tenants—those seeking 10,000 to 50,000-square-foot spaces—out of the market, leading to the slight uptick in vacancy.

“These tenants played a significant role in keeping leasing velocity steady in the prior year but have slowed down a little in 2018 in the face of these rising rents,” Manago tells GlobeSt.com.