Peninsula/San Mateo Office Market Report

1st Quarter 2023

Posted In — Market Research | Market Report


THE PENINSULA OFFICE MARKET reported an average direct asking lease rate of $5.95 /SF full service. This is a change from $5.96 /SF full service from 4Q 2022 and $6.12 /SF from a year ago. Leasing activity stood at 338,367 SF for the quarter roughly a 59% decrease year-over-year. To start 2023, Class A office accounted for 260,982 SF or 77% of the leasing activity. Class B and C offices reported leasing activity of 68,448 SF and 8,937SF respectively.

DIRECT OFFICE VACANCY increased quarter-over-quarter by 10 basis points (bps) to 12.1%, while total vacancy rose by 80 bps quarter-over-quarter to 15.8%. Quarter-over-quarter sublease vacancy increased to 3.8%. While sublease vacancy remains low, it has as grown steadily each
quarter since the 1.4% reported in Q1 2022. Kidder Mathews anticipates sublease vacancy to continue to grow as leases expire and firms re-evaluate their office space needs amidst current economic uncertainty.

THIS QUARTER, NET ABSORPTION totaled negative 268,294 SF—negative for the second consecutive quarter (last seen in Q1 2021). Most of the negative net absorption is coming from South and Central San Mateo County (specifically Redwood City and Menlo Park) while North County Peninsula markets have reported positive net absorption.

OFFICE SALES fell by 62% year-over-year from 845,497 SF to 318,593 SF—up from 96,849 SF quarter-over-quarter. The decline in year-over-year investment sales activity shows some hesitation in the market due to recession concerns. The largest transaction of the quarter was Phase 3 Real Estate’s purchase of Skyway Landing, two office properties totaling 241,571 SF in San Carlos. Hudson Pacific properties sold Skyway landing for $102 million ($422/sf), and the buyer plans to convert the property to life science uses.

THE SAN MATEO COUNTY development pipeline remains strong totaling just under 2 million square feet of office space currently under construction. The only project that was delivered in the quarter was 250 California Dr, Burlingame totaling 30,634 SF of office space. There will
be limited new development planned beyond this coming year and if projects are approved, there will be substantial preleasing lender requirements.


AS OF JANUARY 2023, San Mateo County’s unemployment rate was reported at 2.6%, a 70-bps increase from December 2022. The labor market remains strong despite the increase in unemployment rates, but the effect of the recent layoffs has yet to be felt in the region.

THE SILICON VALLEY BANK recently collapsed and is the largest bank failure since the 2008 financial crisis. This bank failure, in addition to the growing negative economic sentiment and interest rate hikes is concerning to the Bay Area’s office market. All these factors may lead to stricter underwriting criteria, limited short-term demand for office space, and hinder new/existing start-up company growth. The SVB collapse is not indicative of further bank failures—especially in very large national banks which do not have the same susceptibility which toppled SVB. First Citizen’s Bank acquired Silicon Valley Bank, adding to its list of the twenty-plus bank acquisitions since the 2008 financial crisis.


RECESSION CONCERNS continue to rise due to rising interest rates, layoffs, and a bank failure. Many loans on office properties throughout the region are set to mature this year which may cause further distress throughout the market due to the growing office vacancy. The road ahead is bumpy and unclear, but the long-term sentiment of the market still maintains a positive outlook. Large tech firms in the San Francisco Bay Area continued to lay off employees, returning to their pre-covid employment levels. The recent layoffs may drive more employees back into the office, but there will most likely be very limited office demand over the next few months. Rental rates aren’t expected to drop significantly due to higher tenant improvement costs and longer lead times. Offices that do not require a build-out and have desirable amenities will continue to draw more demand than spaces that require more tenant improvements.

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