Office vacancy up, rents flatten, big leases vanish

SAN JOSE >> Silicon Valley's office market experienced rising vacancy rates, flat rental rates and a vanishing act for big leasing deals during the final three months of 2022 amid uncertainties over the economy and tech layoffs.

Those were among the unsettling takeaways in a new report about the South Bay office market that was released by the San Jose office of CBRE, a commercial real estate company.

“The Silicon Valley office market had a slow finish to end 2022,” CBRE stated in a report that covered the October-throughDecember fourth quarter of last year.

The office vacancy rate in Silicon Valley was 14.1% during the final three months of 2022, which was higher than the vacancy rate of 13.6% for the July-through September third quarter of last year, CBRE reported.

“The current state of the economy impacted head count decisions, and layoffs continued,” CBRE stated.

Despite the uncertainties, well-heeled investors bought some high-profile office buildings, especially those with big-time tech companies as the tenants.

One case in point: In October 2022, Germanybased Union Investment Real Estate GmbH and Seattle-based Metzler Real Estate Advisors teamed up to pay $222 million for a big Sunnyvale office complex that's leased to tech titan LinkedIn. The complex has addresses of 684 W. Maude Ave., 686 W. Maude and 480 N. Pastoria Ave. in Sunnyvale.

CBRE's survey determined that smaller office lease deals provided the primary propellant for South Bay rental activity for office space during the fourth quarter of 2022.

“Approximately 63% of the total transaction square footage came from deals under 10,000 square feet,” CBRE reported. “Notably, there were no deals signed exceeding 100,000 square feet.”

Santa Clara had the grim distinction of being the weakest South Bay office market during the fourth quarter, with a vacancy rate of 26.2%, CBRE researchers determined.

Downtown San Jose, still haunted by the side effects unleashed by government-ordered business shutdowns to combat the coronavirus, also posted a relatively high office vacancy rate of 17.4%, according to the commercial property brokerage's survey.

North San Jose, home to numerous tech companies, posted an office vacancy rate level of 16.4%, CBRE reported.

The four office markets with single-digit vacancy rates during the fourth quarter were Sunnyvale, 4.7%; south San Jose, 4.9%; Cupertino, 5.2%; and Milpitas, 6.4%.

Fourth-quarter asking rents for office space came in at an average of $5.65 a month per square foot, which was unchanged from the third quarter, CBRE reported. The $5.65 figure also was unchanged from the third quarter of 2022.

“Many companies continued to evaluate their current footprints and held off on expanding,” CBRE reported. “It is expected they will defer real estate decisions as economic uncertainty continues into 2023.”