MARKET DRIVERS
Since the last quarter, the office availability rate decreased by 60 basis points to 18.2% in 2Q25. Conversely, vacancy rate grew 80 basis points to 17.4% in this timeframe.
Net absorption was -1.1M SF this quarter, down sharply from -200K SF last quarter and 395.5K SF in 2024. Much of this reflects owner-user purchases, which don’t show as leased space despite being occupied.
Asking lease rates increased from $4.01/SF FS (Full Service) to $4.07/SF in the past quarter. This is 0.2% lower than this time last year and a return to a more normal rate that should be expected for the marketplace.
Sales volume hit 1.6M SF this quarter, more than double last quarter’s 707.8K SF and 48.2% ahead of this time in 2024. The average price/SF was $360.26—slightly below last year, but well under the five-year average of $622.98, showing investors’ appetite for discounted deals.
Lease volume reached 2.2M SF SF in 2Q25, which is not too far off from the 2.6M SF recorded for all of 2024 to this point.
ECONOMIC REVIEW
Between January and April 2025, California’s unemployment rate declined by 10 basis points to 5.3%, while Santa Clara County experienced a more significant drop of 40 basis points, reaching 3.9% over the past quarter.
The Professional Business Sector in the San Jose-Sunnyvale-Santa Clara MSA fell 1.8% yearly and 0.1% quarterly to 279.8K, while the information sector declined 0.8% over the year, 0.3% since last quarter.
NEAR TERM OUTLOOK
The Silicon Valley office market is navigating a complex inflection point, where opportunistic sales activity, uneven leasing momentum, and macroeconomic pressure continue to shape dynamics. Sales activity rose in the first half of 2025, with discounted transactions led by owner-users and strategic investors. LinkedIn acquired a 120,000 square foot building for $75 million near its Sunnyvale HQ. Fortinet, Cannae Partners, and VTA made similar moves, with all deals closing significantly below previous valuations, a sign of both distress and long-term confidence in select locations.
Leasing activity showed signs of life, particularly in larger blocks. Zscaler inked the quarter’s largest lease, subleasing 301,000 square feet at 4401 Great America Parkway. Elsewhere, tenants such as One X Tech, Lowenstein Sandler, and ALPFA Medical expanded into high-quality space, reflecting continued demand for well-located, move-in-ready offices. Meanwhile, Google listed a large portion of its Pacific Shores campus in Redwood City for lease, following major cutbacks in its real estate footprint. The shift has left many properties with limited activity, but also created new opportunities for AI-focused firms looking for modern space, including Snowflake and C3.ai.
Tenant improvement costs remain elevated, $245 to $335 per square foot, and uncertainty around tariffs and materials pricing has made budgeting more complex. These challenges have accelerated the ongoing flight to quality, as landlords invest in upgrades to remain competitive. Companies are being selective, gravitating toward assets that minimize buildout timelines and maximize amenities.
Capital markets remain under pressure. Nearly $1 trillion in commercial real estate loans are scheduled to mature in 2025, and CMBS delinquency rates have surpassed pandemic highs. Refinancing activity has slowed, with many borrowers seeking workouts as valuations soften and interest rates remain elevated. Even so, private capital is still circling discounted opportunities, especially for properties with redevelopment potential or long-term strategic value.
While fundamentals remain in flux, early signs of recovery are visible. Leasing velocity across the Bay Area is stronger than last year, and touring activity is up. The next few quarters will be critical in determining whether this interest converts to meaningful deal volume, and whether the capital markets environment allows for broader market stabilization.
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