Rents

Rents for commercial properties, such as the building shown above in downtown San Mateo, continue to increase across the Peninsula.

With expectations that the local economy will continue to thrive, real estate experts are projecting commercial rents throughout San Mateo County will remain high due to limited vacancy — at least for the next couple years.

Asking prices for office space on the Peninsula, spanning from Daly City through Palo Alto, reached $5.95 per square foot at the end of June, according to the most recent report from CBRE, a commercial real estate and investment firm. The figures show a 7 cent increase from the end of the previous quarter, continuing gradual growth over the past two years.

A similar trend is noted in research and development space, or the environment preferred by biotechnology companies, as the average asking price per square foot jumped to $4.15, amounting to a more than 4 percent increase from the end of the third quarter last year, according to the report.

The rates are driven largely by limited available space and increased demand, according to Colin Yasukochi, research director with the service, who anticipates such a swing to continue through the foreseeable future.

“We are faced with a situation where there is not much land available for expansion for commercial properties. So if demand remains strong, as we believe it will, vacancy rates will come down even further,” he said.

Rick Knauf, executive managing director with Colliers International, echoed a similar sentiment, especially as it relates to key commercial corridors near public transportation lines throughout central San Mateo County.

“The momentum in the downtown cores continues to keep moving in a very positive direction,” he said.

He noted desirable job centers such as Burlingame, San Mateo and Redwood City as those most likely to see continued growth in their rents.

The report supports such a perspective, as the average square foot of class A office space in San Mateo costs $5.95, according to the report. The rate reaches $6.50 in Burlingame and Redwood City, which are the most expensive in the central segment of the county.

Knauf said the desirability of such markets is driven largely by the easy access from Caltrain, as workers at tech firms or other companies occupying downtown prefer short trips from the train station to work.

He said the trend was established in recent years, and has gained steam since.

“The dynamic has taken place and picked up momentum,” he said.

The highest asking price in San Mateo County is found in Menlo Park, where premier office space is sought at $10.50 per square foot. Menlo Park’s office market is bolstered by the venture capital firm cluster populating Sand Hill Road.

Neighboring Palo Alto is home to the second most expensive class A market on the Peninsula, as the asking price per square foot ticks down to $9.71. Throughout the region, the average asking price for similar spaces is $6.73, according to the report.

San Carlos saw the biggest price jump recently, as asking prices floated up 46 cents per square foot over the last quarter to $4.59, due to new class A developments, according to the report.

Yasukochi said generally the high prices are generated by vacancy rates, which he said are much lower than they were even five years ago.

The Peninsula office market shows a 7 percent vacancy rate at the end of the most recent quarter, according to the report, down from 10 percent at the same point in 2014.

Even more constrained is the local market for industrial space, as vacancy rates float near 1.5 percent, marking the 10th consecutive quarter in which the rate was below 2 percent, according to the report.

“The big issue with industrial space is that it is an extremely tight market,” said Yasukochi.

The average asking price per square foot of industrial space is $1.35, which is a record high, according to the report.

Contributing to the limited availability and high prices is encroachment from the life sciences industry, said Knauf, as biotechnology companies seeking space are targeting old industrial buildings to redevelop.

“They are buying industrial properties and knocking them down and building biotech campuses,” said Knauf, who pointed to South San Francisco as an epicenter of such activity.

The report supports such a sentiment, as South City’s industrial vacancy rate lingers below 1 percent, while hosting 15.6 million square feet of the Peninsula’s total 35.8 million square feet of rentable industrial space.

With a booming biotechnology industry, South San Francisco’s research and development market is the most expensive in San Mateo County, with a $4.95 per square foot asking price for class A space.

Yasukochi identified the life sciences industry a leader in an economy which he considers strong and unlikely to slow in the immediate term, probably leading to market trends continuing through the foreseeable future.

“If the economy is going to grow for a couple more years, that will lead to increased demand for all types of real estate,” he said.

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(1) comment

kevinburke

"Well there's no chance that high commercial rents will be fixed by adding more office space. After all, the new buildings will be 'luxury office space,' built by greedy developers, unaffordable to the average business."

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