MARKET DRIVERS
OFFICE direct vacancy on the Peninsula rose 20.95% year-over-year, but only rose by 20 basis points (bps) since Q3 to 12.7%. However, sublease vacancy rates continue to decrease with 2.1% for Q4 2021.
THE PENINSULA OFFICE MARKET reported an average direct lease rate of $6.08/SF full service. Most tenants seek shorter term leases as they search for flexible options in the market to adjust for “hybrid” working models.
LEASING ACTIVITY stood at 2.8M SF for 2021. Total Class A lease activity totaled 1.2M SF by years end. 2021’s leasing activity fared much better than 2020’s 1.4M SF.
THE SAN MATEO COUNTY office pipeline remains strong with over 2.3M SF of office buildings under construction. Current ongoing projects include Facebook’s redevelopment in Menlo Park (962,400 SF) and Stockbridge’s Station 1 & 5 in San Mateo (437,000 SF).
OFFICE SALES are on the rise to almost pre-pandemic levels with 2.4M of SF sold in 2021. This is up 233% when compared to 2020’s 728,235 of sold SF.
THE SALES of office buildings for conversion to life science continues to reduce the office market inventory.
ECONOMIC OVERVIEW
DUE TO THE UNCERTAINTY the pandemic has created, many businesses are hesitant to have their employees return to the office. The delta and omicron variants have further delayed tenants returning to the office. However, a high percentage of tenants continue to pay their rent.
SAN MATEO COUNTY’S unemployment rate continues to drop as it sits at 3.1% as of November 2021—150 bps lower than the previous quarter.
NEAR-TERM OUTLOOK
TENANT IMPROVEMENT (TI) costs continue to increase due to the low availability of building materials. This is affecting completion and occupancy dates for new development projects.
CONTINUED DEMAND for lab space on the Peninsula has fueled more office space conversion to life science throughout 2021 such as Phase 3’s purchase of 2001 Junipero Serro Blvd. in Daly City which consists of 383,123 SF (Sold in Q2 2021 ). We expect to see this trend continue throughout 2022.
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