MARKET DRIVERS
THE OFFICE AVAILABILITY RATE rose to 21.6% in 2Q23 which was both an increase from 17.9% in 1Q23 and an increase from 16.6% in 2Q22. This reduction in office space demand can be attributed to company consolidation in anticipation of uncertain economic headwinds.
VACANCY RATES experienced a steady increase of 13.2% compared to the same period last
year and the previous quarter, climbing from 12.6% in both 2Q22 and 1Q23 to 14.3% in 2Q23. To maximize their investments, many tenants have chosen to sublease their space, aiming to generate some returns.
ASKING LEASE RATES of rising interest rates, concerns about a potential recession, and the recent collapse of three regional banks has led to more conservative lending and investor caution. While there was a quarter-over-quarter increase in sales volume, rising from 207k SF in 1Q23, there was a significant year-over-year decline from 814.6k SF in 2Q22 to 244.9k SF in 2Q23.
THE COMBINATION of rising interest rates, concerns about a potential recession, and the recent collapse of three regional banks has led to more conservative lending and investor caution. While there was a quarter-over-quarter increase in sales volume, rising from 207k SF in 1Q23, there was a significant year-over-year decline from 814.6k SF in 2Q22 to 244.9k SF in 2Q23.
CONSISTENT WITH the business sector’s fiscal conservation and office space downsizing, net absorption has reached negative 2M SF in 2Q23. This was a substantial quarter-over-quarter decrease from 594.3k SF in 1Q23 and an even larger drop year-over-year from 1.6M SF in 2Q22.
ECONOMIC OVERVIEW
IN SANTA CLARA COUNTY, the unemployment has remained consistent at 3.1% quarter-over-quarter, while California’s unemployment rate has slightly risen from 4.3% in the previous quarter to 4.5% in the current quarter.
THE PROFESSIONAL BUSINESS SECTOR in San Jose-Sunnyvale-Santa Clara MSAs saw quarter-over-quarter and year-over-year job gains, a refreshing shift in employment compared to previous quarters’ layoffs. Specifically, the sector experienced a 2.8% increase from 249.6k jobs in 2Q22 and a 0.8% increase from 254.5k jobs in 1Q23, a 6.9k year-over-year and 2k quarter-over-quarter job gain.
NEAR-TERM OUTLOOK
THERE IS A NOTABLE DECLINE in office space demand compared to previous years. Tenants are primarily choosing to downsize or renew their existing space temporarily. This decrease in demand can be attributed to factors such as work from home policies, low unemployment rates, economic challenges, and companies
anticipating a reduced need for office space in the future.
GOOGLE LLC is looking to sublease 1.4 million square feet of office space in Silicon Valley, comprising seven buildings in Sunnyvale and Mountain View. This decision comes as part of the company’s efforts to reassess its real estate requirements and align them with its hybrid workforce. The move is also part of a broader cost-cutting initiative following a significant layoff announcement earlier this year. While the sublease listings represent a substantial amount of space, they only constitute a fraction of Google’s extensive real estate portfolio in the Bay Area, which includes millions of square feet of office and R&D space. Despite these changes, Google remains steadfast in its commitment to invest in the local community by maintaining a presence in the Bay Area.
ACCORDING TO A RECENT ANALYSIS conducted by S&P Global, the influence of remote work and decreased office attendance on city revenues has been relatively limited up to this point. While transit ridership has declined and commercial property values have weakened, large cities have demonstrated resilience due to various economic factors. Nevertheless, cities are projecting future revenue losses due to the prolonged impact of reduced office occupancy. In response, major cities are anticipated to proactively tackle these challenges through initiatives like repurposing vacant commercial properties.
MANY MARKETS have been disproportionately impacted by the technology sector’s reduced space requirements for office products, demonstrating low demand. This slowdown in tech leasing, which was previously a dominant force, has significant repercussions for specific office markets. While some major tech companies are gradually returning to the office, the remote work policies and economic uncertainties continue to shape the future demand for office spaces in the tech sector. The surplus of office space in tech-centric markets is expected to provide more leverage for tenants and contribute to higher vacancy rates in the current market.
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