MARKET DRIVERS
OFFICE direct vacancy on the Peninsula rose 0.9% year-over-year but dropped by 70 basis points (bps) to 11.6% since the start of 2022. Sublease vacancy continues to drop and currently stands at a 2.2%—30 bps lower than last quarter. This quarter we are seeing positive net absorption of 443,980 SF which is considerably larger than the negative 296,195 SF seen in the first quarter of 2021.
THE PENINSULA OFFICE MARKET reported an average direct lease rate of $6.12/ SF full service. As most employers are gravitating toward a hybrid work model, they are seeking shorter term leases as they continue to assess their future office space needs.
LEASING ACTIVITY stood at 745,797K, SF roughly 10% lower year-over-year. Reflective of tenants’ desire for higher quality space, Class A Office space leasing activity represented almost all this quarter’s activity with 601,167 SF.
OFFICE SALES remain strong with approximately 440k SF conveyed in $368M in sales. This is a 600% increase in the sold SF year-over-year. The uptick in sales of these office building is primarily driven by the Life Science market with investors converting office space into lab space. This has continued to reduce the office inventory on the Peninsula.
THE SAN MATEO COUNTY development pipeline remains strong with over 1.9M SF of office space currently under construction. Current ongoing projects include Stockbridge’s Bay Meadows Station 1 and 5, consisting of roughly 433,000 SF and is slated for delivery in late 2022. Both buildings were recently pre- leased to Roblox.
ECONOMIC OVERVIEW
SINCE THE OMICRON VARIANT of COVID-19 has started to lose steam, many companies like Meta and Google have publicly announced their return to the office in late March/ early April of this year. Other companies may follow suit and have their employees return for an average of three days a week. With more employers adopting the hybrid work model there has been less traffic during peak commute times, enabling employers to tap into talent from a wider geographic range. San Mateo County’s unemployment rate is 3.1% as of January which has remained low and steady quarter-over-quarter.
EVEN WITH INFLATION ON THE RISE, there is still an abundance of capital in the market attracted to the office market. Strain on the supply chain is delaying construction delivery times, forcing tenants to plan ahead. Tenant improvement costs continue to rise, impacting lease negotiations.
NEAR-TERM OUTLOOK
THERE HAS BEEN A SLIGHT UPTICK in demand for office space as companies plan their return to the office. It is still too soon to see any tangible trends of the office market returning to the heights it once had prior to the pandemic.
DUE TO THE NEW HYBRID work model many employers are assessing the amount of space they will require and how it will lay out. As a result, we are seeing many companies take shorter term leases to mitigate that risk.
THERE IS A STRONG continued demand for lab space on the Peninsula which fueled many conversions in 2021. We expect that trend to continue throughout 2022 due to the extremely low vacancy rate and high demand in the Life Science market. In late March, the Boston based King Street Properties purchased a Burlingame office for $45.2M with plans to develop a 300,000 SF Class A Life Science cluster.
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