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7/03/24
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This report provided by real estate services firm Kidder Mathews
Market Highlights
Asking lease rates increased 3.65% quarter-over-quarter to $2.65/sf/mo NNN.
The vacancy rate saw a slight uptick from 9.8% to 10.3% quarter-over-quarter.
Sales volume saw a decrease from 900.9k sf in 2Q23 to 625.9k sf in 2Q24.
Market Drivers
Asking lease rates rose both year-over-year (YOY) and quarter-over-quarter (QOQ). Asking rates climbed QOQ from $2.56 to $2.65 in 2Q24, up from $2.61 in 2Q23.
The direct vacancy rate increased from 9.8% to 10.3% QOQ, with the most significant shift occurring in Milpitas, climbing from 9.5% to 10.8%.
Gross absorption declined from 1.1 msf in 2Q23 to 827.9k sf in 2Q24. Additionally, total leasing activity is down 13.1% from this time last year.
Despite the decline is gross absorption, cumulatively, net absorption has seen a YOY improvement from negative 685.1k to 80.6k sf. A reason for the improvement is sublet space, which has accounted for 26.6% of total activity this year.
Sales volume saw a QOQ increase from 430.2k sf to 625.9k sf. Despite this increase, sales are still down 6.7% from this time last year.
The R&D availability rate saw a small increase from 10.9% to 11.6%, both higher than the 10.5% recorded in 2Q23. This increase is the highest recorded since 2021.
Economic Review
The unemployment rate in Santa Clara County and California both fell this quarter; from 4.3% to 3.8% in Sant Clara County, and 5.3% to 5.2% for the state.
San Jose-Sunnyvale-Santa Claras manufacturing sector reported 173.7k jobs, marking a 1.1% decrease compared to 175.6k 1Q24, and a 3.2% decrease since 2Q23.
Near Term Outlook
Silicon Valley navigates a period of adjustment, facing challenges like tech industry streamlining, population shifts, and a more selective venture capital environment. However, the region's inherent dynamism persists. This is evident in its post-pandemic employment exceeding pre-pandemic levels by 1.5%, even amidst workforce reductions at major tech companies. Unemployment rates remain lower than the state average, and the market capitalization for publicly traded companies has reached an all-time high, indicating continued innovation and economic activity. Although venture capital investment has moderated, it still leads the nation, with a focus shifting towards green energy, clean technology, and artificial intelligence. Despite these adjustments, Silicon Valley's capacity for adaptation remains robust, solidifying its position as a global innovation hub amidst a changing economic landscape.
The outlook for Silicon Valley's R&D market appears cautiously optimistic despite some headwinds. While challenges like tech industry downsizing and a more selective venture capital environment persist, the region demonstrates continued dynamism. This is evident in its post-pandemic employment exceeding pre-pandemic levels and a record high market capitalization for publicly traded companies. AI, in particular, is a bright spot - with funding reaching new highs and driving demand for office space near research parks as these companies expand. However, a looming concern is the high cost of living which makes it difficult for some workers to afford housing. Educational programs like Ohlone College's manufacturing programs are working to address the skilled labor shortage, and Fremont's business-friendly environment is attracting companies looking to locate in the Bay Area. Overall, while adjustments are being made, Silicon Valley's capacity for adaptation remains strong, suggesting it will retain its position as a global innovation hub.
The information in this report was composed by the Kidder Mathews Research Group Gary Baragona, Director of Research
Data source: CoStar, bizjournals.com, ycharts.com, data.bls.gov
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