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SAN JOSE, CA-Silicon Valley office vacancy was a healthy 10% in March 2007, give or take a few basis points. After five quarters of negative net absorption, it now stands at 12.7%, according to Cornish & Carey Commercial, a well-known brokerage firm in the region.

During those five quarters of negative net absorption only the 5.8 million-sf Mountain View office submarket posted positive net absorption more often than not, and when it was negative it wasn’t by much. Not coincidentally, it also has the lowest average Q2 vacancy rate at 6.7%, up only 10 basis points from Q1, and the one of the highest average asking rental rates at $3.42 per sf per month, fully serviced, down from $3.48 in Q1, according to C&C.

The 1.2 million-sf Downtown Mountain View market produced 37,000 sf of positive net absorption, taking vacancy to 7.1%; the average asking lease rate came in at $4.24 per sf per month. The 2.4 million-sf Shoreline market in Mountain View posted 42,000 sf of negative net absorption but vacancy remained at a miniscule 3.4%; the average asking lease rate is $3.05 per sf per month.

The largest office market in the Silicon Valley, San Jose, rose to 12.2% in Q2 on approximately 350,000 sf of negative net absorption, up 100 basis points from Q1. The average asking lease rate in Q2 was $2.53, up from $2.48 in Q1. Nearly all of the negative net absorption occurred in the 9.4 million-sf Downtown San Jose office market, which hit mid-year with a 15.1% vacancy rate. Vacancy in the 6.2 million-sf North San Jose market came in at 6.7% and the average asking lease rate was $2.74 per sf per month.

The highest vacancy was in the 8.6 million-sf Sunnyvale market, which posted a 22.1% vacancy rate in Q2, down from 24.7% in Q1 but still double what it was one year earlier; the average asking lease rate came in at $3.34 per sf per month, down from $3.43 in Q1.

Studley, a brokerage firm that only represents tenants, paints a picture of decreased leasing activity, saying that gross leasing activity is down by mid-double-digit percentages year-over-year, although C&C’s numbers don’t back that up. Company EVO George Fox comes to the conclusion that “asking rents do not yet reflect the slowing marketplace” but “leasing incentives are mitigating the increases to bring rents in line with market realities.”

Studley lists the quarters top three transactions as EMC’s 105,143-sf lease at 2350 W. El Camino Real in Mountain View/Los Altos; Philips Electronic’s 102,582-sf commitment at 3860 N. First St. in San Jose; and SVTC Technologies’ 87,000-sf lease at 5215 Hellyer Ave., also in San Jose.

“We expect the market to improve for end users as new construction delivers and more opportunities become available,” Fox says. “For those tenants looking to expand or reduce occupancy costs, there’s a lot of leverage to be had in this marketplace.”

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