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SANTA CLARA, CA-When does one million new square feet fail to make a dent in demand? Right here, right now, according to Commercial Property Services’ third quarter report.

Inventory in the Silicon Valley market increased from 5.3 million sf to 6.3 million sf during the third quarter, according to the report, and according to commercial Property Services CEO S. Gregory Davies, the report’s author, it’s still not enough. “Although the increase is significant in real terms, we are still left with a severe supply shortage,” Davies wrote, noting that net demand dropped to 1.2 million sf from 6.6 million sf during the third quarter. “But the increase in space and the decline in demand did not temper dramatically rising rents.”

Valley rents skyrocketed more than 40% to a monthly average of $3.78/sf – an increase attributable to the simple fact that the area is running low on space, says Davies in the report. Indeed, he predicts that that number will jump to $4/sf by year’s end, with current vacancy levels of 4.11% diving as low as 2%. Why? Becuase most of that square footage being delivered in the quarter was spoken for before it ever hit the market. “In this market, space under construction is leased before it is completed,” he wrote. “Of the 11.1 million sf of space under construction in the Valley, 9.5 million is either pre-leased or owned by the company for whom it is built. And land for all types of new development is nearly non-existent.”

Davies discredites two other possible sources for new space – relocating companies and failing companies – since most relocating companies are seeking to expand, not move, their quarters. And most failing companies, he said, typically lease smaller spaces that have little effect on bottom-line figures. “Things have been so much better than anyone expected,” he concluded. “And are likely to continue for some time to come.”

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