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10/03/23
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This report provided by real estate services firm Kidder Mathews
MARKET HIGHLIGHTS
The availability rate increased to 21%
Asking lease rates decreased to $4.48/sf FS
Sale volume dropped to 85.1k sf
Total net absorption rose to negative 243.2k sf
Market Drivers
The office availability rate climbed from 19.3% in 2Q23 to 21% in 3Q23. As many tenants approach upcoming lease expirations, most are proactively reviewing their space needs in anticipation of mounting economic challenges.
The vacancy rate saw an uptick, rising from 14.1% last quarter to 14.6% in 3Q23. Due to decreased occupancy, landlords are prioritizing high-quality spaces as tenants emphasize amenities to attract employees back to the office.
The average asking lease rate experienced a decrease, falling to $4.48/sf in 3Q23 compared to $5.07/sf in 3Q22 and $4.50/sf last quarter. Overall, asking lease rates have been declining as a result of decreased demand for office space, higher vacancy, and increased tenant negotiation leverage.
Last years sales volume reached 1.6 msf by 3Q22, while this year's sales volume has amounted to 697.8k sf by 3Q23, marking a year-over-year decrease of 890.5k sf. These declines can be linked to the impending loan maturity and a heightened level of lender caution.
Year-to-date net absorption equaled 1.5 msf at the end of 3Q23 indicating a general decline in net absorption associated with businesses exercising greater caution in evaluating their space needs. Additionally, net absorption totaled 243.2k sf at the end of 3Q23, marking a notable improvement from -1.9 msf in 2Q23.
Economic Overview
California's unemployment rate saw a minor rise, inching up from 4.5% in the previous quarter to 4.6% in the current one. Likewise, Santa Clara County observed an uptick in unemployment, progressing from 2.7% in the previous year and 3.4% in the previous quarter to the current quarter's rate of 3.6%.
In the San Jose-Sunnyvale-Santa Clara MSA, the Professional Business Sector is exhibiting mixed trends in job growth. On a quarterly basis, the sector has seen positive gains, with a 0.5% increase compared to 2Q23, resulting in a quarter-over-quarter gain of 1.2k jobs. Looking at the year-over-year comparison, there has been a 0.6% decrease in the sector. Specifically, in 3Q22, there were 258.9k jobs, but in 3Q23, the number dropped to 257.4k jobs, resulting in a year-over-year loss of 1.5k jobs.
Near Term Outlook
Landlords are grappling with office vacancies in an economic environment characterized by increasing interest rates, selective investors, and loans worth $3.4 bil scheduled to mature by the end of 2024. These economic hurdles have intensified the costs and intricacies linked to refinancing. Conservative banking practices have resulted in a reduction in property sales and a decrease in purchase offers. Nevertheless, there are ample opportunities in the office market for individuals involved in equity solutions and secondary financing, as well as those contemplating investments in distressed properties. Additionally, individuals holding Class A office properties are also well-positioned to explore favorable prospects in both leasing and sales.
The recent stagnation in office market sales volume can primarily be attributed to the impact of rising interest rates. As borrowing costs continue to climb, both buyers and sellers in the commercial real estate sector are grappling with a misalignment of their respective expectations. Sellers often maintain high price expectations for their properties, influenced by the historically lower-interest-rate environment in which they initially acquired these assets. Conversely, potential buyers are proceeding with caution, anticipating heightened financing expenses, which in turn leads them to approach offers more conservatively. This disparity in outlook has resulted in a market impasse, leading to a decline in transaction activity as both parties navigate the uncertainties stemming from fluctuating interest rates.
The information in this report was composed by the Kidder Mathews Research Group, led by Gary Baragona, Director of research.
Data source: CoStar, data.bls.gov, www.bizjournals.com
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