Tech Accounts for Three-Fourth of Silicon Valley Office Leases
Tech companies were the largest lessors of US office space in 2018, accounting for more than a quarter of the 311.9 million square feet of new leases, and dominating Silicon Valley at 78.1% of leased space.
SAN JOSE—With $133 billion in venture funding, it is no surprise that tech companies were the largest lessors of US office space in 2018, accounting for more than a quarter (25.7%) of the 311.9 million square feet of new leases signed, according to Cushman & Wakefield’s spotlight on tech leasing report. Specifically, the tech sector is dominating the leasing markets in these metros: Silicon Valley at 78.1%, Salt Lake City at 66.4% (a surprising number two) and Greater San Francisco at 60.9%.
The average lease size of a tech company is 71,428 square feet. For a non-tech company, the average lease size is nearly half or 36,250 square feet, says Cushman & Wakefield.
Tech is really a very diverse set of industries, with a total of 46 individual industries in the sector, according to the report. The industry leasing the most space in 2018 was the life sciences sector, which accounted for nearly 20% of total tech leasing.
The San Jose MSA unemployment rate tumbled further last year, closing at 2.5% from 3.1%, which compares to the higher national figure of 3.7%. Job growth in the San Jose metropolitan statistical area continued throughout 2018 with an increase of 3.2% or 35,500 nonfarm jobs year-over-year, according to Cushman & Wakefield. That percentage increase is greater than the rest of the Bay Area including San Francisco.
“However, it is still slower than just a few years ago with the region now at full employment and in-migration slowing,” Ken McCarthy, Cushman & Wakefield’s principal economist, Americas head of applied research, tells GlobeSt.com. “The strongest driver to job growth remains, of course, the tech sector.”
The most recent San Francisco metropolitan division’s (comprised of San Francisco and San Mateo counties) unemployment rate was a minimal 2.2%, below the previous year’s figure of 2.6%. Year-over-year total private sector jobs in San Francisco/San Mateo increased by 2% to 1.023 million, while office-using positions increased 2.5% to 397,400.
Silicon Valley’s R&D vacancy rate decreased to 9.6% during the fourth quarter of 2018, down 70 basis points from 10.3% in the third quarter, thanks to the strong pace of leasing velocity, according to the report. That percentage translates to 16.4 million square feet of vacancy, down from 17.4 million square feet in the third quarter. Sublease as a percentage of all vacant space dropped slightly, ending the fourth quarter at 19.7%, down from 20.3% in the third quarter.
San Francisco’s citywide overall asking rent closed the year at a record $75.57 per square foot, up 6.4% year-over-year. The CBD class-A direct asking rent was a record $82.12 per square foot, up 8% year-over-year.
The citywide overall vacancy rate was 6.4% at the end of the fourth quarter, falling 40 basis points from the third quarter and down 220 basis points from one year ago. This is a three-year low. There was 5.2 million square feet in San Francisco tenant demand at fourth quarter’s end, down 1.2 million square feet since the third quarter, though up nearly 750,000 square feet from one year ago.
Large block demand (50,000-plus square feet) is up 17% year-over-year and continues to outpace supply. The large block direct space market will remain very tight through the end of the decade, thanks in part to very little available new construction delivering in that time period. As an example, office construction completions totaled 3.7 million square feet in 2018 and closed the year 100% pre-leased.