MARKET DRIVERS
THE PENINSULA office market reported an average direct asking lease rate of $5.96/SF full service. This is a change from $6.02/SF full service from 3Q2022 and $6.08/SF from a year ago. Leasing activity stood at 207,118 SF for the quarter and 1,982,913 SF for the year. This quarter, Class A office accounted for 102,928 SF of the leasing activity, reflecting some of the tenants’ willingness to pay for higher quality space. Class B and C offices reported leasing activity of 83,104 SF and 21,086 SF respectively.
DIRECT OFFICE VACANCY increased quarter-over-quarter by 60 basis points (bps) to 12.1%, while total vacancy rose by 90 bps quarter-over-quarter to 15.1%. This rise in total vacancy is primarily attributed to the increase in direct vacancy and a slight quarter-over-quarter increase of 30 bps in sublease vacancy. Sublease vacancy currently sits at 3%, but the lack of a dramatic increase in sublease vacancy indicates a relatively stable market.
YEAR-TO-DATE net absorption was positive 240,876 SF. This quarter, net absorption totaled negative 346,535 SF, the second quarter in which the Peninsula reported negative net absorption this year.
OFFICE SALES fell by 93.6% year-over-year from 1.5 million SF to 98,618 SF. The decline in investment sales activity shows hesitation in the market due to recession concerns, employee preference to work from home, and rising interest rates.
THE SAN MATEO COUNTY development pipeline remains strong totaling 2 million square feet of office space currently under construction. No projects were delivered this quarter, but several large projects are slated for delivery in 2023 such as 3150 S Delaware in San Mateo totaling 218,554 SF. 3150 S Delaware was 100% pre-leased to Roblox in early 2022. There will be limited new development planned beyond this coming year and if projects are approved, there will be substantial preleasing lender requirements.
ECONOMIC OVERVIEW
IN OCTOBER OF 2022, San Mateo County’s unemployment rate was reported at 2.1%, remaining steady since June of 2022. However, it remains to be seen how the unemployment rate will be affected by the recent tech layoffs throughout the Bay Area.
THROUGHOUT 2022, inflation has been on the rise leading to several interest rate hikes. The rise in inflation continues to strain the supply chain causing the cost of raw materials used in construction to increase, further delaying delivery times and tenant improvement projects.
NEAR-TERM OUTLOOK
RECESSION CONCERNS have been growing since the start of 2022 but reached new heights with several recent waves of layoffs—primarily in the tech industry. This is negatively affecting the demand for office space in the Peninsula, as uncertainty in the market grows. Tenants continue to “right-size” into smaller space and look for shorter term leases as they weigh the impact of work from home. Landlords are pivoting to shorter term leases to keep occupancy levels up with the hope upon lease expiration tenants will commit to a longer-term renewal.
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