MARKET DRIVERS
Since the last quarter, the office availability rate increased by 30 bps (basis points) to 20.1% in 4Q24. Conversely, the vacancy rate decreased 10 bps to 16.7% in this timeframe. This means that landlords listing spaces that are currently occupied on the market at a marginally higher rate than vacant spaces are being leased.
Net absorption was 1.1M SF this quarter, bringing the cumulative absorption to 564.7K on the year. 2024 was not the strongest year for net absorption, but it is a solid rebound from the 1.3M SF of negative net absorption recorded last year.
Asking lease rates decreased from $4.09/SF FS (Full Service) to $4.07/SF in the past quarter. This is the lowest recorded rate since 2019, and 2.6% lower than this time last year.
The sales volume this quarter was slow, only seeing in 123.5K SF in transactions. Despite the slow finish, this was the strongest year for sales since 2021, and the 2.8M SF in purchases more than doubled the yearly volume sold in 2023. Interest rates are projected for two more reductions in 2025, leading experts to believe that sales volume will continue to rise, especially in the second half of the year.
ECONOMIC OVERVIEW
Unemployment in the San Jose-Sunnyvale-Santa Clara MSA fell 50 bps to 4.1% quarter-over quarter. Conversely, California’s unemployment rate increased 10 bps to 5.4%.
The Professional Business Sector in the San Jose-Sunnyvale-Santa Clara Metropolitan Statistical Area (MSA) saw an increase both yearly and quarterly, reaching 249.1K this quarter. A pain point in the marketplace is the Information sector which is down 6.0% since last year.
NEAR-TERM OUTLOOK
The direction of the office market remains uncertain. Many office leases are long-term, meaning some pre-pandemic agreements are reaching their end, and these tenants will likely be seeking to downsize their space. At the same time, more companies are implementing return-to-office policies, which will inevitably increase demand for space. Looking ahead, anticipated interest rate cuts could drive increased activity in 2025, though uncertainty around potential new administration policies may result in a cautious and slow start to the year. Although office vacancy rates declined slightly this quarter, they remain significantly elevated, with experts believing they won’t begin to lower until the second half of the year. As the year progresses, these moving pieces and their effects on the market will become clearer, creating opportunities for decision makers to act in their best interests.
A trend seen throughout the nation is office conversion projections taking place. These projects are extremely expensive and difficult but are vital in the current market where California Is actively experiencing a housing crisis, and there is a severe oversupply of office product. Conversion is not the only option. For instance, San Jose recently approved a demolition of a 67,000 SF commercial building that was only occupied by the property owner in favor of building 334 housing units. The state of California has instructed San Jose alone to add 62,200 units of housing by 2031. If the city is to meet these requirements, it would make sense for them to approve as many conversion projects as they feasibly can.
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