Silicon Valley has seen a sharp increase in office availability thanks to a flood of givebacks from big tech companies, according to Silicon Valley’s second-quarter report. Savills. But despite the increase in available space, landlords are still attracting high prices.
The availability rate increased by 3.5 percentage points to 26.6 percent in the second quarter from 23.1 percent in the first quarter. Available sublease space also continued to increase, ending the quarter at an “all-time high” of 7.6 million square feet, up 55% from the 4.9 million square feet reported a year ago.
“Office supply in Silicon Valley is at an all-time high and is expected to increase further as the entire tech industry adjusts, as office returns lag behind the rest of the country despite high-profile corporate announcements,” the report said.
The biggest office givebacks come from Google They put more than 1.4 million square feet on the market for sublease. Meta and Roku are also back in the market. The amount of square footage sold has not kept pace with the pace of new leases on the market.
“Big companies are dumping space on the market, but there’s hardly anyone taking it,” said Craig Petersen of Kidder Mathews. “We’re seeing more activity in the small office market.”
Leasing activity remained low at just under 668,000 square feet, down 35% from the 1.0 million square feet reported last quarter and down 52% from the 1.4 million square feet reported a year ago. Suppressed leasing activity did not affect prices, with the overall average asking rent rising to $5.18 per sq. ft. per month from $4.99 per sq. ft. in the previous quarter.
Rents are rising because much of the available space in Silicon Valley is “high-end,” making it difficult for landlords to pay their debts if they lower rents.
“Typically, when supply and vacancy rates rise, rents fall,” said Michael Soto, head of office research at Savills. “But rents have been very sticky because many landlords Big concessions are being offered to keep surface rents high. Also, there are a lot of office landlords who simply cannot lower rents because of debt covenants with their lenders.”
Not only are companies unloading space, they’re halting major construction projects that could reshape Silicon Valley.Google has discontinued its Downtown West San Jose project. The development near Diridon Station includes 4,000 homes, 7.3 million square feet of offices, 500,000 square feet of shops and restaurants, a community center and 15-acre park. Google’s reassessment stems in part from a lag in Silicon Valley’s return to the office, resulting in a stagnant office environment.
“When the pandemic came, all new development was put on hold and not launched due to extremely high office vacancies, not just Google’s,” Petersen said. “Starting a project with office vacancies so high Projects are going to be crazy.”