Silicon Valley’s office leasing market slowed down in 2Q22

The market for office space in Silicon Valley cooled off markedly in the second quarter, according to a new report.

The net amount of space absorbed in the period — i.e., the amount of space leased, occupied or torn down less the amount of space vacated or completed — was 707,000 square feet, according to the report from Colliers. That’s the least amount of absorption since the third quarter of last year and was down 38% from the first quarter of this year.

The fall-off wasn’t due to a glut of new space. Developers completed less than 638,000 square feet of office space in the area in the second quarter, the least amount since at least the second quarter of last year. Nearly all of that new space — 595,000 square feet of it — came in the form of Google LLC’s Charleston East campus in Mountain View, which the internet giant owns and will occupy itself.

Over the last year, office leasing in the area has been dominated by larger businesses, particularly the big tech companies. But those companies appeared to stay largely on the sidelines in the second quarter. About 87% of new office leases were for spaces of less than 10,000 square feet, according to Colliers.

“Large tech companies are continuing to expand, albeit at a slower pace,” Lena Tutko, Colliers’ research director for Silicon Valley, told the Business Journal.

The report comes amid an uncertain time in the office market. Developers have nearly nine million square feet of office space under construction in Silicon Valley and millions more in development. But there are growing fears that rising interest rates, coming in response to high inflation, could spark a recession that could dampen demand. And the resurgence of the Covid-19 pandemic in the form of new variants has already forced many companies to rethink their return-to-office plans and embrace remote work.

Despite the slowdown in leasing activity, Silicon Valley’s office vacancy rate dropped from 10.6% in the first quarter to 10.1% in the second, according to Colliers’ report. Its total availability rate, which includes both space for lease by landlords and that up for sublease, fell from 15.4% to 14.7% over the same period.

Prices are falling in some places

Still, both rates were high by historical standards; the vacancy rate remains at a level not seen in some seven years, when the area was still recovering from the Great Recession.

With leasing activity slowing down, landlords started to cut asking rents, Colliers reported. On average across all classes of office space in the region, landlords were asking $5.27 a square foot in the second quarter. That was down from $5.32 in the first quarter and $5.42 in the fourth quarter.

To be sure, the rent story varied considerably by city. In Palo Alto, asking prices jumped by 28 cents a foot from the first quarter to the second to $8.66 per square foot. In Mountain View they rose 31 cents a foot over the same time frame to $8.18 a square foot. By contrast, asking rents in Los Altos fell 21 cents a foot from the first quarter to the second to $6.56 a square foot.

The two biggest leasing deals of this quarter were subleases in Santa Clara, according to Tutko. Pure Storage took over Analog Device’s 330,000-square-foot space in the city’s Santa Clara Square development in June and plans to use it as an expanded headquarters. Meanwhile, Applied Materials subleased Aruba Networks’ 245,830-square-foot space at 3335 Scott Boulevard.