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4/03/26
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This report provided by real estate services firm Kidder Mathews
Market Highlights
• LEASING VOLUME totaled 2.1M SF in 1Q26, up 48.2% YOY
• RENTAL RATES averaged $4.16/SF FSG in 1Q26, up 5.7% YOY
• SALES VOLUME totaled 615.0K SF in 1Q26, down from 832.6K SF in 1Q25
Market Drivers
• The Silicon Valley office market vacancy rate held steady quarter-over-quarter (QOQ) at 16.5% in 1Q26 and improved 10 basis points (bps) year-over-year (YOY). Total availability tightened further to 16.6%, down 80 bps from 4Q25 and 260 bps from 1Q25, reflecting a continued reduction in marketed space despite only limited change in overall occupancy.
• Leasing activity totaled 2.1M SF in 1Q26, up 46.7% from 4Q25 and 48.2% from 1Q25. Even with that rebound, total net absorption was slightly negative at 39.2K SF, following the outsized 1.5M SF gain recorded in 4Q25, suggesting that demand remains concentrated in a handful of larger commitments rather than broad-based market recovery.
• Office investment sales totaled 615.0K SF across 11 transactions in 1Q26. While traded square footage was below both 4Q25 and 1Q25, dollar volume rose to $546.1M and average pricing climbed to $902.62/SF, driven by a small number of high-value trades and continued interest from owner-users and selective institutional buyers
Economic Review
• Using the latest available labor market data, Santa Clara County’s unemployment rate was 4.0% in December 2025, up 10 bps from one year earlier. California’s unemployment rate was 5.5% in December, keeping the county below the statewide average even as labor conditions remained softer than pre-pandemic lows.
• The San Jose-Sunnyvale-Santa Clara MSA’s employment base was relatively stable through year-end 2025. Total nonfarm employment measured 1.149M jobs in December 2025, up 2.8K from September. Information sector employment was essentially flat at 93.3K jobs, while Professional & Business Services employment totaled 275.5K, down 1.2K from September, underscoring that the region’s office demand drivers remain intact but selective.
Near-Term Outlook
• Recent activity in Silicon Valley suggests that the office market’s recovery is still being shaped by large, strategic occupier decisions rather than a broad return in day-to-day leasing. That pattern was visible in 1Q26, when Pure Storage leased 440,132 SF in Santa Clara, Infineon took 220,872 SF in North San Jose, and Databricks renewed 180,417 SF in Sunnyvale. Those deals helped push quarterly leasing above 2.0M SF, even as total absorption finished near flat, reinforcing that momentum is concentrated in high-conviction transactions and better-quality product.
• Outside the quarter’s top transactions, AI-related expansion continues to provide one of the clearest signs of demand. OpenAI’s recently reported roughly 450,000 SF lease in Mountain View points to continued appetite from next-generation technology users for large, campus-style space in core Silicon Valley locations. At the same time, San Jose’s new office-to-residential conversion incentive program underscores a parallel reality: older and less competitive inventory is increasingly being repositioned rather than held for a full traditional office rebound.
• Taken together, these trends point to a market that is gradually stabilizing, but one where recoveries will likely remain uneven by asset quality and submarket. Well-located buildings that can attract AI, enterprise software, and established technology tenants should continue to outperform, while obsolete product faces growing pressure to compete on price, reposition, or convert to alternative uses.
The information in this report was composed by the Kidder Mathews Research Group and provided by Kidder Mathews Vice President of Research Gary Baragona. Data source: CoStar, BLS, EDD, FRED, The Business Journals, SF Chronicle, The Registry
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