Tech Continues to Make Silicon Valley a Top Commercial Growth Market

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Research and Development Market

Silicon Valley's R&D vacancy rate decreased significantly to 9.1% during the second quarter of 2019, down from 9.8% in the first quarter. After a negative growth start to the year, net absorption surged with 1.2 msf in the second quarter, bringing mid-year 2019 growth to 917,000 sf.

"Fueled by Q2, year-to-date R&D net absorption in 2019 already nearly doubles the full 2018 absorption of 491,000 sf," said Julie Leiker, Cushman & Wakefield's Research Director for Silicon Valley. "During the second quarter, North San Jose led the Valley with 575,000 sf of occupancy growth, sparked by two significant user sales from Google (332,000 sf) and Lumentum (238,342 SF). Newark also posted solid net growth with nearly 350,000 sf of positive absorption largely stemming from Lucid Motors moving into 305,000 sf, while Santa Clara and Sunnyvale each came in over 100,000 sf."

Leiker pointed out, "Notably, ASML penned a lease for 265,000 sf in North San Jose during the second quarter which will hit our occupancy figures further into the future."

New R&D product under construction consists of 3.6 msf broken down into 1.8 msf of build-to-suits and 1.8 msf of speculative product. Notably, 50% of the "spec" space is preleased.

The Valley's Office Market

Silicon Valley's office vacancy rate climbed to 10.0%, up from 9.3% in the first quarter. Following a slow yet positive start in the first quarter of 2019, office occupancy took a further step back in the second quarter as net absorption tumbled to negative 448,000 square feet (sf), bringing year-to-date occupancy to negative 160,000 sf.

Leiker states, "Despite the occupancy loss in the office sector, the future looks brighter as there was strong gross absorption (leasing) at 3.0 msf of signing activity up from 1.7 msf in the first quarter. The biggest lease of the quarter was from Google, which leased 728,335 sf in North San Jose at a new development site from Peery Arrillaga. And there were several other sizable tech deals inked. We saw significant preleasing activity with occupancy expected in the second half of 2019 and into 2020. We also anticipate more large deals to be signed ahead."

New office product under construction across the region currently stands at approximately 5.3 msf, composed of 4.4 msf of speculative product and 915,000 sf of build-to-suits. Importantly, most of the 4.4 msf of "spec" is already preleased.

R&D/Office Insights

Eric Fox, Executive Managing Director, comments, "Capital markets activity in Silicon Valley continued to be healthy through the first half of 2019. Fundamentals remain strong throughout the Bay Area and investor optimism for tech-driven real estate is still in high demand. The Valley is one of the few suburban markets in the country to be attracting investor attention. Parts of the Valley continue to set new high pricing marks, especially transit-oriented locations."

Drew Arvay, Managing Director, said, "Behind a second quarter surge that saw vacancy drop and net absorption on pace to triple 2018 levels, combined with significant preleasing of new construction foretells a strong finish for a fluid R&D market. As would be expected, technology tenants will dominate the growth in both leasing activity and user purchases. With the pool of tenants in the pipeline, we expect to see more preleasing driven by large deals in the remainder of the year. As of mid-year, we are tracking 11.3 msf of active office/R&D tenant requirements and believe much of this demand will transition to activity in the next few quarters."