South Bay office market reaches ‘turning point’ amid rebound.
Leasing in region reaches best level in three years
SAN JOSE >> The South Bay office market posted its best performance in about three years during the second quarter, the first hint that the region’s commercial property sector is beginning to recover from its coronavirus-linked ailments, a report released Thursday shows.
Companies filled up 2.8 million square feet of office space in the South Bay in the April-through-June quarter of 2021, which was the best showing since the second quarter of 2018, Colliers reported.
The office space was filled through a combination of new leases, pre-leased new office buildings that tenants occupied during the quarter, and office buildings that companies bought for their own occupancy.
The pandemic created uncertainty surrounding the future of offices when remote work became the new normal in Silicon Valley, Colliers, a commercial real estate firm, stated in the report.
However, a noticeable improvement has arrived in the region’s office sector, according to the report, which was authored by Lena Tutko, research director with Colliers.
“The second quarter of 2021 marked a turning point in Silicon Valley’s office market,” Tutko wrote.
The office leasing activity as measured by Colliers was more than triple the activity during the second quarter of 2020, according to Colliers.
“With COVID-19 restrictions phasing out and more companies announcing their return-to-office plans, deal velocity accelerated,” Tutko wrote in the report.
The tech sector is the primary propellant behind the increase in deals to fill up offices in the South Bay.
“Home-grown tech giants like Apple, Applied Materials, and NetApp deepened their footprint,” Colliers stated in the report.
Among the notable deals during the April-June quarter of 2021:
• Apple leased 701,000 square feet in Sunnyvale’s Pathline Park office project, which is being developed by Irvine Co.
• Two office buildings, a movie theater complex, and a parking structure in The Village at San Antonio Center in Mountain View were bought for $630 million in March by Brookfield Partners.
• NetApp signed a lease in April to shift its headquarters to San Jose’s Santana Row, renting an office building that totals 301,000 square feet.
• Developer Tishman Speyer bought NetApp’s campus in Sunnyvale, paying $365 million for the complex, which totals 700,000 square feet.
• Applied Materials in May paid just under $81 million for three buildings in Sunnyvale.
• Google won approval in May for the development of a game-changing mixeduse neighborhood in downtown San Jose where the search giant could employ up to 25,000. The project would include offices, homes, shops, restaurants, and hotel facilities.
The momentum could continue: Facebook is eyeing the NetApp campus and may be seeking to lease up to 1 million square feet in the South Bay.
Not everything is rosy, however, for the region’s office sector.
During the second quarter, the office vacancy rate in the South Bay increased to 10%, compared with 9.4% in the first quarter of 2021 and 6.5% in the second quarter of 2020.
However, office rents are on the increase.
The average rental rate was $5.26 a square foot per month for South Bay offices during the second quarter of 2021.
That was an increase from the first quarter when office rents were $5.15 a square foot and from the second quarter of 2020 when rents were $5.24.
The jump in office deals appears to bode well for the long-term health of the South Bay commercial property sector.
“Despite a trend of flexible and hybrid work models, physical campuses will continue to play a vital role in Silicon Valley’s unique culture and growth,” the Colliers report stated.