MARKET DRIVERS
Asking lease rates climbed 3.1% year-over-year (YOY) and 0.8% quarter-over-quarter (QOQ) to $2.67 NNN.
The direct vacancy rate increased 50 basis points (bps) to 10.6% QOQ, with the most significant shift occurring in Sunnyvale, climbing 230-bps to 11.5%.
Leasing activity declined from 1.1M SF in 3Q23 to 533.9K SF in 3Q24. Additionally, cumulative activity is down 40.4% from this time last year.
The decline in cumulative gross absorption is also reflected in net absorption which is down YOY from -178.0K to -494.1K SF. A reason for the improvement is sublet space, which has accounted for 26.6% of total activity this year.
Sales volume decreased 28.4% to 724.7K SF QOQ and are also down 5.7% cumulatively.
The R&D availability rate saw a 30-bps increase to 11.8% QOQ, and a 120-bps YOY. This is the eight straight quarter of availability increases but is still shy of the post pandemic high of 13.2% in 2021.
ECONOMIC REVIEW
Santa Clara County and California experienced slight increases in unemployment rates. In Q3 2024, Santa Clara County’s rate rose by 60 basis points to 4.4%, while California’s saw a 10-basis-point uptick to 5.3%.
San Jose-Sunnyvale-Santa Clara’s manufacturing sector reported 174.0K jobs, marking a 3.4% decrease since 3Q23 and a 0.2% slip since last quarter.
NEAR TERM OUTLOOK
The biggest piece of recent news across the commercial real estate landscape is the Federal Reserve interest rate cut, which is poised to be beneficial to the Silicon Valley R&D market in a few different ways. Firstly, it incentivizes significant sale transactions to be completed while rates are low. Additionally, a driving force for the R&D market are start-up and tech companies who require private equity and venture capital funds to attain financing for leases, and these cuts will allow funds to be more accessible to them. Although the R&D market has seen vacancy and availability rise, it is still a highly competitive market as shown by the increasing asking rates. The potential for further rate cuts could stimulate investment activity and pushing leasing and sales transactions higher in the coming year.
Transactions and construction news has been slow, but there are still important projects and deals to highlight. In a market where many traditional office properties are selling for less than market value, Klein Investments purchased 3011 N 1st St in San Jose for $63.6M, a 28.2% profit form it’s purchase in 2021, and well above the Santa Clara County Assessor’s Office reported value of $52.7M. Another big move in the market was Google filing a proposal to the city of San Jose to renovate 5079 Disk Drive and turn it into an R&D facility, indicating that the tech giant sees value in this property type. At face value, the numbers from this quarter would indicate that the R&D market has cooled, but transactions and proposals like these indicate that there is still a great demand for R&D properties and that the market is still strong even in a tough economy.
Click here to subscribe to Kidder Mathews market research.