MARKET DRIVERS
The office market showed signs of life during the second half of 2024, although there is still a ways to go before the market shifts to a sustained recovery cycle. While it will remain a tenant’s market heading into 2025, cautious optimism persists, and the future remains bright. In fact, for the first time since the onset of the pandemic, there has been a handful of longer-term lease commitments on the Peninsula, and there appears to be an increase in overall tenant interest compared to recent years. The Peninsula office market also continues to be anchored by a stable, long-term ownership base that has been able to withstand the various market challenges since the pandemic. As such, there is a limited number of
distressed properties and very few at-risk loans coming due in 2025, unlike other office markets throughout the country.
VACANCY & DEVELOPMENT
While vacancy rates on the Peninsula continued to increase in 2024, the rate of increase has been decelerating compared to recent quarters. As a result, both large vacancy and sublease vacancy have been stabilizing with most of the newer spaces coming online being either smaller or mid-sized availabilities direct with the landlord. Direct vacancy was 18.6%
at year-end, while overall vacancy was 24.0%, both up compared to 14.9% and 20.2% at year-end 2023, respectively. Annual net absorption remained negative in 2024 with -799,051 SF, but was much improved compared to last year’s figure of -1.7M SF. Although total leasing activity continues to be a bit stagnant due to limited demand and very few significantly
expanding tenants, year-end figures are also improved with 2.7M SF of total leasing activity in 2024. Sublease availability declined in Q4 for the first time since, largely due to Snowflake subleasing 772,000 SF in Menlo Gateway, with a move-in date scheduled for April of 2025. Lastly, speculative development has been significantly slowed due to the lack of pre-leasing activity in recent years coupled with increased construction/financing costs.
ECONOMIC LANDSCAPE
Economy uncertainty remains across the Bay Area, with lukewarm job growth, increasing unemployment and elevated interest rates. Although inflation rates have recently stabilized, many expect core inflation to remain above the Fed’s target of 2% in 2025. There has also been a limited amount of new start-up activity on the Peninsula, indicating a pause in economic and entrepreneurial growth – which is expected to be a short-term trend. With that said, the overall economic outlook is relatively positive for 2025 with many employers projected to hire during the first half of the year. And after a subdued couple of years, there has been a recent uptick in both venture capital funding and M&A activity – both long standing drivers of the Peninsula office market. If this trend continues, it should bode well for future growth.
NEAR-TERM OUTLOOK
In early 2025, there will be a few trends worth monitoring. First, more and more companies are beginning to implement return to work mandates that are expected to revitalize most office markets across the country, including the Bay Area. While work from home and hybrid work policies will persist, there is expected to be a conscious shift to a more balanced workforce. If this trend continues to gain momentum and employees continue to fill office buildings, the office market will likely shift to recovery and growth mode sooner than expected. Additionally, the upcoming administration change will likely bring new policies impacting both the economy and commercial real estate – with potential tax breaks and a notable shift to a business-friendly environment that could spur future growth in the office market. In the near-term, the Peninsula market will remain tenant favorable, due to the high vacancy rates and subdued tenant demand. Landlords will likely continue offering concessions to attract tenants, while speculative new development will remain constrained until market fundamentals improve.
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