MARKET DRIVERS
Asking lease rates climbed 0.8% quarter-over-quarter (QOQ) and year-over-year (YOY) to $2.68 NNN.
The direct vacancy rate increased 10 basis points (bps) to 9.2% QOQ, with the highest increase occurring in Milpitas, climbing 140-bps to 11.7%.
Leasing activity fell from 1.2M SF in 4Q23 to 654.3K SF in 4Q24. Cumulative activity was also 26.3% lower this year than in 2023.
Despite the sharp decline in leasing activity, net absorption was marginally higher in 2024 than in 2023. With that said, cumulative net absorption was -595.6K SF, reflecting the struggles faced in the R&D market this past year.
Sales volume decreased 48.1% to 503.1K SF QOQ and cumulative sales volume ended 4.7% lower than it did in 2023.
The R&D availability rate saw a 40-bps increase to 11.9% QOQ, and a 140-bps YOY. This is the ninth straight quarter of availability increases but is still shy of the post pandemic high of 13.3% in 2021.
ECONOMIC REVIEW
Santa Clara county has outpaced the state of California in unemployment rate this past quarter. California’s unemployment rate increased 60-bps to 5.4% while Santa Clara County declined 50-bps to 4.0%.
San Jose-Sunnyvale-Santa Clara’s manufacturing sector reported 173.1K jobs, marking a 3.0% decrease since 4Q23 and a 0.5% dip since last quarter.
NEAR TERM OUTLOOK
The recent election and rate cuts could have a large impact on the Silicon Valley R&D market in 2025. Although this round of cuts has yet to lead to increased activity, as rates continue to fall, it will only incentivize further investment to occur while rates are at their best. On top of increased sale transactions, the falling interest rates could open the ability for start ups to acquire capital that they can turn around and use to lease spaces. On top of rate decreases, the new Trump administration is expected to implement tariffs and limit immigration, which will make construction more expensive. R&D already has a short pipeline of new construction, and these policies will likely keep it that way in the short term. Even with vacancy and availability as high as they currently are, asking rates continue to rise. With new deliveries further slowing and rates dropping, there is a chance to see a limit in supply and an increase in demand that could help the market rebound in 2025.
The largest lease recorded in the marketplace tells a story of the importance of R&D space, what is in demand, and why. PsiQuantum’s lease at 275 S. Hillview Dr. in Milpitas totaled 127,574 SF, yet the space sat vacant for 2 years prior to this transaction. Cannae Partners, the property’s landlord, purchased it for $32.8M from Analog Devices this year and then spent millions on upgrading the and modernizing the site which was built in 1988. The results clearly worked, as it enticed PsiQuantum to sign the deal in hopes to use the facility to build quantum computers. Other prospective tenants liked the site for its power capabilities, something that has become increasingly rare over the years as the United States has outsourced advanced manufacturing to other countries and R&D sites have been retooled into office and housing sites. Some expect that this policy is beginning to switch back in favor of producing specialized goods in the US, which would lead to a large increase in demand for these spaces.
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