The San Francisco Peninsula and Silicon Valley commercial real estate markets have experienced a remarkable recovery from the economic downturn, driven primarily by unprecedented growth in Northern California’s tech sector. During the height of the recession, San Francisco’s largest firms slashed their labor forces, if not closing their doors entirely, and returned millions of square feet of commercial real estate. Vacancy rates soared and rental rates plummeted by almost 30%. The San Francisco office market alone was hit with 3.7M square feet of additional vacant space.
While the recession caused millions of West Bay finance and professional services employees to lose their jobs, the tech sector was gaining momentum. Facebook, Apple and Google were changing how we communicate, work and socialize, leading a multitude of tech start‐ups in the world of mobile, cloud and social technologies. The tech sector has been the primary force behind the San Francisco Peninsula’s post‐recession employment and real estate growth, resulting in a 59% increasing in average office rents, a record 3.4M SF of office absorption, and the second lowest retail vacancy rate in the country.
San Francisco Peninsula – The office, industrial and retail sectors within the San Francisco Peninsula have all benefited from the tech driven recovery. San Francisco’s office vacancy rate has dropped to 8.5%, with 18.1% year‐over‐year rent growth resulting in a $52 average rental rate. New development had been limited to major renovations, but new construction has begun, with as much as 4.5M square feet on the drawing board. SF Peninsula’s office vacancy rate is down to 10.7% and lease rates have also broken $50. Office absorption has slowed in most submarkets, as would be expected given the prior years’ performance.
The SF Peninsula industrial market has continued to perform well in 2013, albeit at a slower pace. The vacancy rate has stabilized at 6.8%, while lease rates continued to grow, currently averaging $1.58/month. There has been virtually no new industrial construction.
The retail market’s 2.7% total vacancy, second only to New York City, is well below the 2001‐’11 average of 4.3%. Retailers are primarily focused on expansion in San Francisco’s urban core, although limited space has hindered demand. Limited development opportunities, coupled with the low vacancy will drive up rental rates, currently averaging just above $30.
Silicon Valley – Silicon Valley’s recovery has been relatively strong, although not matching The Peninsula’s. Office vacancy is down to 11.5%, a considerable improvement from its 20%‐plus peak in 2009. Office rates have grown over eight consecutive, currently averaging almost $37, allowing continued expansion of office development.
Silicon Valley’s industrial sector has softened somewhat, with an increase in vacancy rate to 8.2%, while lease rates increased slightly, to an average of $0.58/month. The R&D market continues to improve, however, reflecting a 12.2% vacancy rate and average lease rates increasing to $1.60/month. RTA will continue to monitor the progress of these markets.