New Office Deliveries Create Tenant’s Market in the Silicon Valley

Silicon Valley office tenants could gain the upper hand at the negotiation table. In the first quarter, office inventory in the market increased by 17 million square feet, according to research from Savills, but leasing activity continues to struggle following the pandemic. The combination is good news for tenants looking to find a deal on class-A product.

The Silicon Valley market had a robust development pipeline heading into the pandemic, but the market impacted demand. In the first quarter, leasing activity fell from 1.6 million square feet before the pandemic to only 400,000 square feet. As a result, the vacancy rate has climbed from 14.4% to 18.4% and asking rates have decreased to $4.82 per square foot, down $0.08 from the first quarter last year. With new product continuing to arrive, tenants will find plenty of opportunities to secure quality space.

In addition to new supply, the Silicon Valley also had a substantial increase in sublease space. A report from Colliers last month found that the market’s sublease supply has increased 64% through April 2021, up 1.5 million square feet. Since March 2020, there have been 180 new subleases added to the market, creating a total of 248 subleases available. In total, there is 3.9 million square feet of sublease supply on the market in the first quarter; however, the market share of sublease supply is declining from its peak in the third quarter of 2020. In the first quarter, sublease space was 25% of the total office supply, down from approximately 26% in the third quarter 2020.

Landlords, however, are starting to see a light at the end of the tunnel. Vaccine distribution has helped beat back the virus, resulting in eased restrictions and more market confidence. As a result, occupiers are once again reevaluating office strategy in favor of returning to the office. According to the Savills report, more new office lease inquiries are for larger spaces and users are willing to commit to longer lease terms. That is a clear shift from earlier in the pandemic when 60% of lease renewals were short-term deals. Today, 80% of leases are new transactions.

In the first quarter, tenants have favored the North San Jose market, which accounted for 40% of all new lease transactions. In addition, healthcare assets were the most active subcategory, accounting for nearly 40% of total deal volume.