R&D lease rates reach record high in Silicon Valley

It’s a good time to be looking for an office in Silicon Valley — and an even better time to own research and development property in the region.

Average monthly office asking rents dropped to $5.27 a square foot from $5.33 from April to June, the second straight quarter-over-quarter decline, according to a new report by Colliers.

Average monthly asking rents for research and development properties hit an all-time high of $2.80 a square foot last quarter, eclipsing the high-watermark set during the previous three months, the report said.

Silicon Valley’s office asking rents were stable through 2020 and last year as developers and owner-users completed new offices and more space became available in premier submarkets such as Palo Alto, according to Colliers research director Lena Tutko.

Although rents rose about 5 percent to around $5.40 a square foot a month last year, landlords significantly increased concessions to tenants compared with typical pre-pandemic terms, according to Tutko.

“Now that the pandemic dust is settling, pricing is adjusting to meet today’s office demand,” she wrote in an email.

While Silicon Valley’s office market has seen three consecutive quarters of positive net absorption, the R&D real estate sector has performed better in two key metrics: vacancies and growth in asking rents. The vacancy rate in the latter market has dropped to 6.3 percent from 8.3 percent a year ago, compared with staying between 10 and 11 percent for offices during that time, according to Colliers. Asking rents for R&D buildings are up 10 percent year-over-year, while the cost to lease office space directly from a landlord is on par with rates seen a year ago, Colliers’ numbers show.

Silicon Valley’s R&D market has been minimally impacted by remote work trends, a key reason it’s recovering at a faster pace than the office sector, the report said. It helps that more life science and biotech tenants are entering the fray, including medical tech company BD, which agreed to rent 240,000 square feet over two buildings in Milpitas’ “Park Point” campus in May, the Valley’s largest new R&D lease last quarter, according to Colliers. The commercial brokerage firm expects the market for research space to remain tight due to healthy demand from core sectors such as semiconductors and emerging ones such as life science and autonomous driving.

The outlook for the office market is less rosy, as rents could continue dropping through the rest of the year due to slowdowns in venture capital funding and hiring from several major tech companies, as well as the potential for layoffs, according to Tutko. Reasons for optimism remain: Apple, which plans to slow hiring for some departments next year, leased a 382,500-square-foot office campus in Sunnyvale in May, one of several tech companies that signaled a commitment to physical workplaces through large new leases or subleases last quarter.