The pandemic afflicted commercial real estate markets across the Peninsula according to recent reports showing vacancy rates rising in all sectors — though the research and development space showed some immunity to the hazard posed by COVID-19.
In reports summarizing activity over the fourth quarter of last year, commercial real estate companies CBRE and Colliers both illustrated the extent to which remote working arrangements and other factors linked to the pandemic battered the leasing market.
Though the figures differ slightly, both reports suggest that office vacancy rates float somewhere near 10% or 12% throughout the Peninsula, a stark increase for a sector that had experienced historically low availability and record high prices before business was upended by the virus.
“The end of a difficult year for the commercial real estate market left with the highest vacancy rate in several years. The Greater San Francisco Peninsula … remains severely muted due to the ongoing pandemic, with new leasing activity rare,” said the Colliers report, which spans San Mateo County and the northern segment of Santa Clara County.
Office vacancy in the region ended the year at 9.7% — up from the year prior — according to the Colliers report that said San Mateo County’s vacancy rate hit 10.6% at the end of 2020.
The CBRE report offers an even more dire assessment of San Mateo County, with a reported vacancy rate reaching 11.9% — almost twice the vacancy rate of about 6% from the beginning of the year, before the economy was disrupted.
“Market wide vacancy and availability have been steadily rising. A mixture of scheduled and unexpected move outs, along with a decrease in tenant demand have been the driving forces behind this trend,” said the CBRE report.
Yet despite the unfavorable conditions, the reports suggested little discount has been offered to tenants as rental rates remain relatively high. The CBRE report claimed the average asking price per square foot of office space is $6.74, while the Colliers report suggested the weighted asking rate for the same amount of space is $5.74.
CBRE offered a clear-eyed assessment of the future of office pricing though.
“As the market continues to soften due to increasing supply, downward pressure on asking rates could be acknowledged to make up for the decline in demand,” said the report.
Prevailing conditions have cooled the industrial real estate market too, according to the Colliers report that showed vacancy rates are up from the remarkably low levels struck in 2019.
The Colliers report claimed industrial vacancy rates increased to nearly 5% in the last quarter of 2020, while the CBRE report said the sector’s vacancy rate sat around 4.4% over the same period of time.
But as the Colliers report noted, the industrial sector had reached likely unsustainably low rates of vacancy when the local economy was humming. Additionally, the company shared some optimism that the market will recover in short order.
“Institutional buyers remain very bullish on the sector and purchase prices for industrial buildings and land continued to hit new highs in 2020, even amongst the pandemic. Faith in the market and product type has not faltered,” said the report.
The industrial market has been propped up locally by the encroachment of life sciences companies in search of relatively affordable land to build research and development space. But a notable investment by Prologis in an 8.2-acre site in South San Francisco gave Colliers enhanced confidence that the market can stand on its own.
“While most industrial sites in the area have been converted to life science, this project is intended for a new high end distribution facility, unlike any we have seen on the Peninsula to date,” said the report.
Regarding the life sciences industry, which saw marginal activity interruptions over the year, both reports remain bullish on the future investment of research and development spaces.
“San Mateo County already contained the most significant life science campuses in the Bay Area and COVID-19 has considerably accelerated investment in biotechnology and demand for this specialized asset class,” said the Colliers report, which said vacancy rates slipped by .4% over the year to 3.6%.
While the CBRE report claimed the market’s vacancy rate ticked to 5%, the company also expressed confidence in the industry’s ability to sustain itself.
“Fueled by life science demand, the San Francisco Peninsula R&D market has proven to be one of the more resilient product types in the Bay Area,” said the report.
Those notes of optimism are further expanded across the commercial real estate landscape as both reports share some faith that the vaccine may cure the interruption plaguing the economy over the past year.
“Following Bay Area shelter in place orders, and severe limitations on events and travel, economic indicators have showed a slowdown in what was looking like a speedy recovery,” said the CBRE report. “However, there is optimism around the nationwide roll-out of the COVID-19 vaccine, which has given a rough timetable on when general life may return to normal.”