SILICON VALLEY INSTITUTE for REGIONAL STUDIES

Quarterly Report

SILICON VALLEY COMMERICAL SPACEQ1 2017

This report is released on a quarterly basis by the Silicon Valley Institute for Regional Studies, in partnership with JLL Silicon Valley.

www.jointventure.org/institute

Summary:

• Developers continued to break ground in Silicon Valley and throughout the Bay Area in Q1, but a cooling of pre-leasing activity in the suburban markets led to increased vacancy rates (when unleased projects were delivered to the market).

• Office space rental rates are coming back down slightly following the jump in 2016 as sublease space (and increasing availabilities driven by M&A activity) provides a release valve for tenants.

• The demand for transit-oriented commercial space remains high, leading to contin-ued increases in rental rates, decreases in vacancy rates, and continued development along major transit lines.

Silicon Valley is experiencing cautious optimism carried over from 2016 while several large corporate technology firms have put space back on the market, preemptively buckling down should the economy begin to signal a slowdown. Although require-ments for larger spaces have declined, many tech companies are continuing their growth, albeit at a slower pace when compared to 2015-2016.

Q1 2017 occupancy losses were a function of muted leasing activity, rightsizing (con-solidation combined with more efficient utilization of space) by some traditional office tenants, and consolidation due to merger and acquisition deals that closed in 2016. However, despite less overall leasing of space, large-space leasing activity was strong in both Silicon Valley and San Francisco in Q1 as Uber, Slack, Cavium, and Accenture landed expansionary space of more than 100,000 square feet each.

Silicon Valley Commercial Space, Q1 20172

Contents:

A. New Commercial Development ............................................................................................................................................4

A1. Quarterly Commercial Space Completions by Sector, Silicon Valley, 2000 – Q1 2017.........................................................4

A2. Annual and Year-to-Date Commercial Space Completions by Sector, Silicon Valley, 2010 – Q1 2017 ...............................4

A3. Large Office Space Completions, Silicon Valley, Q1 2017 ......................................................................................................4

B. Commercial Vacancy Rates .....................................................................................................................................................5

B1. Quarterly Vacancy Rates, Silicon Valley, 2010 – Q1 2017 .......................................................................................................5

B2. Q1 Vacancy Rates by Sector, Silicon Valley, 2000 – 2017 .......................................................................................................5

B3. Average Office Space Vacancy Rates by Proximity to Transit, Bay Area, Q1 2017 ................................................................5

C. Commercial Rents ......................................................................................................................................................................6

C1. Nominal Quarterly Asking Rents by Sector, Silicon Valley, 2010 – Q1 2017 .........................................................................6

C2. Inflation-Adjusted Q1 Asking Rents by Sector, Silicon Valley, 2000 – 2017 ..........................................................................6

C3. Average Office Space Asking Rents by Proximity to Transit, Bay Area, Q1 2017 ..................................................................6

D. Tech Occupancy ..........................................................................................................................................................................7

D1. Commercial Office Space Under Construction and Share Pre-Leased to Tech Firms, Bay Area, Q1 2017 ..........................7

Silicon Valley Commercial Space, Q1 2017 3

A. New Commercial Development

A1. Quarterly Commercial Space Completions by Sector, Silicon Valley, 2000 – Q1 2017

Milli

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0.5

1.0

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'17'16'15'14'13'12'11'10'09'08'07'06'05'04'03'02'01'00

IndustrialR&DO�ce

A2. Annual and Year-to-Date Commercial Space Completions by Sector, Silicon Valley, 2010 – Q1 2017

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1

2

3

4

5

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Q1 20172016201520142013201220112010

Industrial R&DO�ce

0.75 0.950.36

1.621.98

5.04

6.30

1.77

Nearly 1.8 million square feet of new Silicon Valley commercial space construction were completed in

Q1, including 675,000 square feet of industrial and 1.1 million square feet of office space. Office space

completions were much lower than during the booming Q3 2015 – Q2 2016 period, where quarterly totals

reached more than 2.6 million square feet (in Q2 2016).

Year-to-date completions of Silicon Valley commercial space were nearly 1.8 million

square feet, representing 28% of the amount completed during last calendar year’s boom.

62% of the 2017 completions was Office space, and 38% was Industrial. There was no

Silicon Valley R&D space completed in Q1.

Notable Silicon Valley office space completions in Q1 included a

ground-up 260,000 square foot development by Rockwood Capital in

Moffett Park Sunnyvale, a 247,000 square foot Class A development in

Santa Clara by Menlo Equities that is part of an approximately 1.4 million square foot campus (part of which is

preleased to Palo Alto Networks), and a 214,000 square foot, creative Class

A development in East Palo Alto at 2100 University Avenue. 

A3. Large Office Space Completions, Silicon Valley, Q1 2017

Street Address City Owner/ Developer

Rentable Building Area (square feet)

Percent Leased at

Time of Delivery

237 Moffett Park Drive Sunnyvale Rockwood Capital 260,000 0%

3335 Scott Boulevard - Bldg D Santa Clara Menlo Equities 246,765 100%

2100 University Avenue Palo Alto Sobrato 214,052 100%

3025 Clearview Way San Mateo Deutsche/Embar-cadero Capital 107,000 100%

80-85 Willow Road Menlo Park Deutsche AWM 85,000 0%

1450 Page Mill Road Palo Alto Stanford 77,199 100%

385 Sherman Avenue Palo Alto Minkoff Group 63,746 100%

Silicon Valley Commercial Space, Q1 20174

B. Commercial Vacancy Rates

B1. Quarterly Vacancy Rates, Silicon Valley, 2010 – Q1 2017

0%

5%

10%

15%

20%

25%

30%

20172016201520142013201220112010

IndustrialR&DO�ce

B2. Q1 Vacancy Rates by Sector, Silicon Valley, 2000 – 2017

0%

5%

10%

15%

20%

25%

30%

Q1 2017

Q1 2016

Q1 2015

Q1 2014

Q1 2013

Q1 2012

Q1 2011

Q1 2010

Q1 2009

Q1 2008

Q1 2007

Q1 2006

Q1 2005

Q1 2004

Q1 2003

Q1 2002

Q1 2001

Q1 2000

IndustrialR&DO�ce

B3. Average Office Space Vacancy Rates by Proximity to Transit, Bay Area, Q1 2017

0%

2%

4%

6%

8%

10%

12%

Not Near TransitNear Transit

8.2%

10.7%

Vacancy rates for Silicon Valley Office space increased to 13.3% in Q1 from 11.5% in the previous quarter; while vacancy rates for Industrial and R&D space remained relatively stable.

Q1 2017 vacancy rates for Silicon Valley Office space were 0.8% higher than in Q1 2016, while remaining lower than in Q1 of all other years since 2001.

Bay Area office space vacancy rates near transit are 2.5 percentage points lower than for locations not near transit.

Silicon Valley Commercial Space, Q1 2017 5

C. Commercial Rents

C1. Nominal Quarterly Asking Rents by Sector, Silicon Valley, 2010 – Q1 2017

$0.00

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00

'17'16'15'14'13'12'11'10

IndustrialR&DO�ce

C2. Inflation-Adjusted Q1 Asking Rents by Sector, Silicon Valley, 2000 – 2017

Askin

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ts (In

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$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

$7.00

$8.00

Q1 2017

Q1 2016

Q1 2015

Q1 2014

Q1 2013

Q1 2012

Q1 2011

Q1 2010

Q1 2009

Q1 2008

Q1 2007

Q1 2006

Q1 2005

Q1 2004

Q1 2003

Q1 2002

Q1 2001

Q1 2000

IndustrialR&DO�ce

C3. Average Office Space Asking Rents by Proximity to Transit, Bay Area, Q1 2017

$0.00

$1.00

$2.00

$3.00

$4.00

$5.00

$6.00

Not Near TransitNear Transit

$5.04

$3.75

Silicon Valley commercial asking rents decreased slightly in Q1 for Office ($4.06 per square foot, down

from $4.21 in Q4) and R&D ($2.12, down from $2.34) space, while increasing slightly for Industrial

space (up nine cents per square foot, to $1.18).

Average asking rents continued to rise in Q1 for Silicon Valley Industrial space, reaching $1.18 per square foot (up from $1.09 the previous quarter) and representing

the highest average asking rent for Industrial space since 2001; meanwhile, Office space asking rents were down

5.5% year-over-year (after adjusting for inflation).

Bay Area office space asking rents near transit are 1.3 times higher than for locations not near transit.

Silicon Valley Commercial Space, Q1 20176

D. Tech Occupancy

D1. Commercial Office Space Under Construction and Share Pre-Leased to Tech Firms, Bay Area, Q1 2017

Milli

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0.0

15.5

Millions of Square Feet

Pre-Leased to Non-Tech Firms, 1.8

Pre-Leased to Tech Firms, 5.3

Not Pre-Leased, 8.4

} Pre-Leased to Non-Tech Firms, 25%

Pre-Leased to Tech Firms, 75%

Annotations:

Data Source: JLL

Analysis: Silicon Valley Institute for Regional Studies; JLL

Notes: Data represents the end of each annual period unless otherwise noted. Com-mercial space includes Office, Industrial, and R&D space. The JLL inventory includes all development above 35,000 square feet, with the exception of Downtown Palo Alto and Downtown Mountain View. Silicon Valley data includes San Mateo County, Santa Clara County, and the City of Fremont. Bay Area data includes all San Francisco Bay Area Submarkets, including Silicon Valley, North Bay, Mid-Peninsula, Oakland, and East Bay Suburbs. Average asking rents are “Full Service Gross” (FSG), which is the monthly rent-al rate and includes common area maintenance fees, utility fees, and taxes/insurance fees. The vacancy rate is the amount of unoccupied space, and is calculated by dividing the direct and sublease vacant space by the building base. The vacancy rate does not include occupied spaces presently being offered on the market for sale or lease. Aver-age asking rents, where not noted as nominal, have been inflation-adjusted and are reported in 2017 dollars, using the February 2017 Bay Area consumer price index for all urban consumers from the Bureau of Labor Statistics. Near transit is defined as located within a 10 minute walk of a Caltrain, BART, or VTA station.

Resources:

• For questions regarding this quarterly report, contact Rachel Massaro, Vice President and Senior Research Associate at Joint Venture Silicon Valley (massaro@jointventure.org).

• For more information about Silicon Valley’s commercial real estate market, contact Christan Basconcillo, Research Manager at JLL (Christan.Basconcillo@am.jll.com) or visit www.jll.com/silicon-valley/en-us/research.

• To access Silicon Valley’s online data hub, visit www.SiliconValleyIndicators.org.

Of the 15.5 million square feet of new office space under construction last quarter, 34.5% is pre-leased to tech firms (with 46% pre-leased overall). Of the space that is pre-leased, 75% is pre-leased to tech.

Silicon Valley Commercial Space, Q1 2017 7

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This quarterly report was prepared by Rachel Massaro, Vice President and Senior Research Associate at the Silicon Valley Institute for Regional Studies, in partnership with Christan Basconcillo, Research Manager at JLL Silicon Valley. Jill Jennings created the report’s layout; Duffy Jennings served as copy editor.

Silicon Valley Institute for Regional Studies

The Silicon Valley Institute for Regional Studies provides research and analysis on a host of issues facing Silicon Valley’s economy and society. The Institute is housed within Joint Venture Silicon Valley.

Joint Venture Silicon Valley

Established in 1993, Joint Venture Silicon Valley brings together established and emerging leaders—from business, government, academia, labor and the broader community—to spotlight issues, launch projects, and work toward innovative solutions. For more information, visit www.jointventure.org.

JLL Silicon Valley

JLL is a leading professional services firm that specializes in real estate and investment management. A Fortune 500 company, JLL helps real estate owners, occupiers and investors achieve their business ambitions. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit www.jll.com/silicon-valley.

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