2015 Breaks All Records
At the close of 2015, Santa Clara County finds itself among the strongest markets in the United States. Employment in the region has increased substantially since the beginning of the current cycle; the region has added over 154,700 jobs since Q1 2011.
Total regional employment now stands at a record one million jobs while unemployment is down to just 3.8%. Thanks to a strong trend of in-migration, the Bay Area now has the highest labor force on record.
Vacancy Rate: 7.5%
The office market in the Silicon Valley ended 2015 with a vacancy rate of 7.5%. This is down slightly from the 7.7% rate recorded in Q3 and substantially lower than the 9.6% reading of one year ago. The 7.5% vacancy translates to 5.7 million square feet (msf) of availabilities down from 6.7 msf from one year ago.
Even with more than 6.4 msf of new office space added over the last 12 months, local vacancy levels continue to decrease as most of this new development is either in the form of build-to-suits (bts) or speculative projects that are being leased up prior to delivery.
The market recorded 1.1 msf of occupancy growth in Q4 down from Q3’s reading of 1.8 msf. This brings the annual occupancy growth to a historical record of 7.4 msf. This level of occupancy is double the previous record of 3.7 msf in 2000. Deal activity is also at its highest level ever recording at least 3 msf each quarter in 2015. This brings annual totals to 13.7 msf; the previous record, again set in 2000, was 11.7 msf.
Biggest Deal in Silicon Valley
In Q4, the largest deal in the Bay Area was done in the Silicon Valley.
A confidential tenant pre-leased the 777,000 sf project from Landbank Investments in Sunnyvale. Also contributing to the record gross absorption for the year was a large user sale.
Broadcom, Facebook, Visa
Broadcom purchased four buildings in North San Jose totaling 573,000 sf. Included in the sale was expansion land where an additional 500,000 sf can be built. Other notable transactions include Facebook (210,000 sf in Menlo Park) and Visa (62,000sf in Palo Alto). Not showing any signs of slowing down, Apple leased another 200,000 sf in North San Jose.
The average asking rate for office space increased in Q4 to $3.99 per square foot (psf) on a monthly full service basis. This number stood at $3.51 psf one year ago. The 101 Tech Corridor cities command the highest rents (currently averaging $7.21 psf). The West Valley submarkets are averaging $3.73 psf while the Central Silicon Valley trade areas are averaging $3.28 psf. The average deal rate for the region now stands at $4.37 psf. The 101 Tech Corridor submarkets continue to record the highest deal rates in the region; this metric now stands at $6.57 psf. The Central Silicon Valley submarkets presently average $3.10 psf while the average rate for the West Valley now stands at $4.11 psf.
Investor Demand Robust
Investor demand for Silicon Valley product remains robust, particularly for well-located, modern buildings with long-termtenancy in place. Top transactions in Q4 included a recording breaking sale of three class A buildings in Downtown MountainView, Castro Station to TIAA-CREF. Other key sales this quarter included the purchase by Sand Hill Properties of Cupertino Professional Center (74,000 sf) and Peninsula Land & Capital’s purchase of Castro Commons (42,000 sf) also in Downtown Mountain View.
These transactions come as vacancy rates in the 101 Tech Corridor have reached low single digits and average asking rents head north into uncharted territory, a byproduct of the district’s increasing popularity with VC firms, established tech companies and startups.
Construction across the region stands at 5.7 msf. This breaks down to 3.0 msf of BTS product and 2.7 msf of speculative product. Of the spec constructionNe, 1.2 msf was started this quarter in Santa Clara. The balance of the construction should be completed in 2016 which may result in a slight uptick of vacancy.
However, demand remains extremely strong for class A product and there are several large tenants in the market looking for space. The Silicon Valley shows no signs of slowing. We expect new space at speculative developments to be leased up at a fairly brisk pace. Meanwhile, look for rents to continue to climb into the first quarter of 2016.