Login

Peninsula/San Mateo Office Market Report

4th Quarter 2023

Posted In — Market Research | Market Report

MARKET DRIVERS

Demand for office space continued to be limited throughout 2023 as many firms continue
to reassess their office needs and evaluate hybrid working models. The Peninsula office
market reported an average direct lease rate of $5.91 /sf full service, a slight drop quarterover-
quarter from $5.93/sf full service and has remained relatively steady since the start of
2022. Total leasing activity stood at 561,054 SF for the quarter, a 29.5% increase year-overyear.
Class A offices accounted for a majority of the leasing activity throughout the fourth
quarter with 297,740 SF while Class B and C offices reported leasing activity of 225,496 SF
and 37,818 SF respectively.

Vacancy and availability rates continue to rise throughout the Peninsula office market. Direct
office vacancy increased quarter-over-quarter by 10 basis points (bps) to 14.2%, while total
vacancy rose to 19.9%. Sublease vacancy grew from 4.4% in the third quarter to 5.7% in the
fourth quarter, a trend Kidder Mathews is monitoring closely.

This quarter is the fifth consecutive quarter of negative net absorption totaling -625,246 SF
resulting in 1,856,896 SF of negative net absorption for the entirety of 2023. The last time
the region had a full year of negative net absorption was in 2020, which resulted in negative
658,881 SF. South San Mateo County accounts for majority of the region’s negative absorption
for both this year and quarter with approximately 1.7 million SF of negative net absorption
year-to-date.

The San Mateo County development pipeline totals 1.73 million square feet of office space
currently under construction. JMS Development Partner’s 993 Laurel in San Carlos was
delivered, totaling 16,609 SF. A total of 326,297 SF of office space was delivered in 2023 and
there are limited developments planned beyond this coming year. Any approved projects
will have substantial preleasing lender requirements and some planned developments may
be placed on hold until interest rates settle and tenant demand increases.

ECONOMIC OVERVIEW

As of October 2023, San Mateo County’s unemployment rate was reported at 3.2%, a 100-bps increase year-over-year, but significantly lower than California’s 4.8% unemployment. Despite the year-over-year increase, unemployment throughout the region is relatively low, indicating a stable labor market.

Investment sales activity remained extremely limited throughout 2023, resulting in only 86,678 SF of office properties trading hands in the fourth quarter. Throughout 2023 only 545,228 SF of office properties were sold, roughly a quarter of the 2 million SF sold in 2022. Unsurprisingly, average price per square foot fell year-over-year by 32.6% from $763.00/sf in 2022 to $513.80/sf in 2023.High interest rates, limited demand, and lack of recent comparable data continues to widen the gap on pricing between buyers and sellers. Despite the limited office market activity, we are not seeing a trend of distressed properties being turned over to the lender, demonstrating the stability of the region’s ownership.

NEAR-TERM OUTLOOK

The Peninsula office market generated little demand throughout 2023. Businesses continue to “right-size” or occupy less space than they previously occupied as they weigh their options of hybrid working models and their return-to-office. After a year of relatively steady rental rates, this quarter, rates have begun to soften slightly. This may result in more prospective tenant demand—especially from the professional sector and tenants who never left the office. If interest rates start to come down and the stock market continues to perform, demand may pick up in the second half of 2024 as recession concerns may begin to fade.

Click here to subscribe to Kidder Mathews market research.

Share This Report