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SAN MATEO, CA-The rate at which office vacancy is climbing in San Mateo County is tapering off, according to a mid-year market report by Colliers International.What was an average quarterly increase of 5% during 2001 has slowed to an average increase of 0.5% through the first half of 2003, according to the report. At the end of the second quarter, vacancy stood at 23.29%, a 0.86 percent increase from the end of the first quarter. As well, year-to-date net absorption, although negative to the tune of 241,948 sf, compares well to mid-year 2001, when it was at negative 2.6 million sf, and mid-year 2002, when it was at negative 1.03 million sf.

Jeff Dizon, research analyst at Colliers in San Mateo, says the number of layoffs also has leveled off in San Mateo County. “So we definitely think we’re heading toward stabilization of the market,” says Dizon, adding that the area’s desirable geographic location and attractive demographics have it postured to begin a modest rebound in the near future.

Nonetheless, the situation heretofore has translated into an unprecedented 8.9 million sf of available office space, up from just 325,218 sf in mid-2000, reports Dizon. About 28% of the total available space, or 2.5 million sf, is sublease space.

“Since mid-2000, landlords have been competing with a major infusion of sublease space,” Dizon said. “However, with available sublease space shrinking and the most desirable (of such) spaces gone, landlords are slowly beginning to regain control.”

For now, however, and the foreseeable future, it will continue to be a strong tenant’s market until vacancies drop to below 10%, says Dizon.

There continues to be minimal demand for requirements above the 8,000- to 10,000-sf range, gross activity is increasing, says Dizon. Most of the demand is for space less than 5,000 sf and for lease terms of less than five-years, he says.

If the local economy continues to stabilize, Dizon is predicting positive absorption will start occurring and rents will stabilize sometime during the first half of 2004.

The average asking rental rate for San Mateo County remained fairly stable at $2.21 per square foot per month, $0.09 lower from last quarter. Deals are being made at up to 20% lower than the asking price, he says.

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