Commercial Leasing in Silicon Valley Jumps Almost 50 Percent

Silicon Valley’s commercial market saw a breakneck comeback in the third quarter, with leasing coming at a clip not seen since before the pandemic.

Leasing activity for commercial property in Santa Clara County, San Mateo County and Fremont totaled 20.4 million square feet in the third quarter, the Mercury News reported, citing new findings from the Silicon Valley Institute for Regional Studies and JLL. The pace of commercial leasing was up 48.9 percent from the 13.7 million square feet that was leased in the second quarter.

Artificial intelligence, unsurprisingly, is a big factor.

“AI is driving a lot of what’s happening in Silicon Valley and San Francisco,” Phil Mahoney, an executive vice chairman with Newmark, said. “Nvidia, Google, Meta, Microsoft and Apple are all doing well, and that is great for the overall environment. You have the major companies, and you have the rising up of AI-funded growth companies. These have certainly helped to absorb a lot of the better space.”

That improvement is expected to continue into next year, with leasing activity predicted to increase even further.

The surge follows a string of headline deals, such as major downtown Sunnyvale leases by Databricks and Crowdstrike, that helped absorb large blocks of space. Tenants who might have sat on their hands in recent years are now back on the hunt, some brokers say.

“Tenants are out right now looking for real deals,” Colliers executive vice president David Sandlin said.

“The market is certainly more positive than it was two years ago,” Newmark’s Mahoney added. “There was a lot of momentum going into the election last year that was lost in the first quarter. But that momentum is now coming back.”

Commercial development, meanwhile, is also inching toward a comeback. About 5.6 million square feet of new space was delivered in the third quarter, up 5.5 percent from the 5.3 million square feet of completed development in the previous quarter. A newly built office building in San Jose’s Santana Row has been among those new constructions drawing several leasing tenants.

At the same time, the market’s scars are hard to miss. While office vacancies dipped slightly to 22.2 percent from a record high of 23 percent in the second quarter, they remain more than double pre-pandemic norms and above dot-com bust levels. Laboratory space, once viewed as a shining light in the commercial property sector after the pandemic, reached a 37 percent vacancy rate after a development boom far outpaced demand. Asking rents also slid 7 percent from last year, marking their lowest point in a decade.

Still, the quarter saw positive net absorption, suggesting companies are taking slightly more space than they’re giving back. Colliers’ large-user pipeline, for example, has ballooned to 11 million square feet, up from 2 million during the pandemic. — Chris Malone Méndez