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Silicon Valley offices less empty than other regions

Commercial vacancy rates hovered near 17.7% in the valley, compared with roughly 24% in San Francisco and 20% in the East Bay
San Jose's downtown skyline, with residential high rises and modern office buildings; Silicon Valley, California

In the wake of the pandemic, Silicon Valley is faring better than other nearby areas when it comes to office vacancies. But researchers say decisions on work culture at major tech companies could change the dynamic.

That's according to a recent report from Joint Venture Silicon Valley and commercial real estate broker JLL, which focused on commercial space statistics and trends in the region for the third quarter of 2022. The jury is still out on the long-term ramifications of how hybrid and remote work expectations will impact the commercial real estate market.

"Overall, Silicon Valley has remained one of the most resilient office markets in the country," Alexander Quinn, JLL senior director for research in Northern California, told San Jose Spotlight.

At the end of the third quarter, commercial vacancy rates hovered near 17.7% in the valley, which the report defines as Santa Clara and San Mateo counties, along with the cities of Fremont and Newark. Quinn said San Francisco vacancy rates were about 24%, and slightly more than 20% in the East Bay.

The vacancy increase in Silicon Valley is because of new property that has come online recently, but is not yet occupied, Quinn said.

In the first quarter of 2020, before the effects of the pandemic were fully captured, Quinn said the region had a vacancy rate of 7.9%, with about 57.7 million square feet of commercial space occupied. At the end of the third quarter in 2022, the region had 57.4 million square feet occupied, but the vacancy rate jumped to 17.7%.

"That's a pretty drastic shift. We've added a ton of inventory over that period," Quinn said.

Commercial leasing remains strong

The report also shows demand is holding strong, as the number of commercial leases through the third quarter exceeded last year's totals. But the average amount of space per lease is decreasing across all types of commercial property.

Rachel Massaro, director of research at Joint Venture's Institute for Regional Studies, noted that even as the amount of space being leased may drop in the short term, the region is still churning out more new commercial space.

"It's not necessarily a bad thing that we use less space and make more room for startups and other companies to take up some of these smaller spaces and subleases," Massaro told San Jose Spotlight.

The third quarter saw less than half a million square feet of new office space being completed, but the region is on pace to see about 4.4 million new square feet of commercial space finished this year.

Massaro said that's a slower pace than the rapid building boom of the past five years, with about 10 million square feet of commercial space completed last year. This is much better when compared to the dearth of commercial building a decade ago, she said.

"Commercial space is continuing to be developed and continuing to be completed in our region, and a lot of our major companies are going to fill that space, I have no doubt," Massaro said.

Quinn agreed, saying there's approximately 3 million square feet planned in the downtown San Jose area, well above historic norms.

"It's a long-term bet and expectation that Google and others will center their future commercial footprint in the downtown," Quinn said. "Historically, if there is one big tech user that comes in, then there is a whole other ecosystem that also joins in."
Google is proceeding with its massive multi-billion-dollar Downtown West development that will span roughly 80 acres near Diridon Station and could take about a decade to complete.

Google anticipates up to 25,000 people working in its downtown offices, across 7.3 million square feet of office space. The project plans also call for adding 4,000 homes, 15 acres of parks, a large community center and its own microgrid.

Downtown has several major commercial projects in the works, including a recently approved high-rise from Urban Catalyst that will include 525,000 square feet of office space. Developers Urban Community and Westbank are also planning the Park Habitat project, a 20-story tower with 928,000 square feet of office space.

Quinn added whether or not companies demand their workforces return to offices is a fundamental factor in the commercial real estate market long term.

He said the tech layoffs making headlines in recent weeks are not a "dot com crash," but more of a correction, after many companies made big additions to their workforces in 2021. Many also did not add office space during that growth and may not need to greatly reduce it now. He said pressure to increase profit margins may push some companies to cut their real estate portfolios in the coming year.

Quinn and Massaro noted that some companies have not finalized their long-term remote work policies yet, and those that have may need to shift them.

"I think it's quite a smorgasbord. There are quite a variety of companies that are saying we are going to be forceful about bringing our workers back, and there are others that continue to be very friendly towards that, and feel that remote work works for them," Quinn said/

This story, from Bay City News Service, was originally published by San Jose Spotlight.

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