After years of rent increases, the cost of leasing office space in San Mateo County ticked down recently and experts are at odds over what the discount means for the future commercial real estate market.
Construction is booming, office rental rates dipped marginally and vacancy is expected to increase in the next quarter, according to the most recent market report from commercial real estate company Colliers International.
Such market forces helped generate a rare win for local businesses seeking relief from the constant cost growth in San Mateo County, as the report showed office asking prices dropped down to $5.08 per square foot, a 10 cent discount from the last quarter.
The reduction is an exception to the general rule established in the market that has shown almost constant annual growth since the Great Recession, when the cost per square foot for office space floated near $3.
Bill Allen, the first vice president of investment at commercial real estate company Marcus and Millichap, said he has not seen the ongoing price increases harm business interest.
“Inventory is very tight. Pricing continues to be very strong, and that is supported by a low interest rate environment. And we are not seeing rates increase at such a rapid pace that it is affecting demand,” said Allen.
The Colliers report though offers a more customer-friendly analysis, suggesting the asking price drop could be indicative of a general trend developing.
“The small dip in leasing activity could easily be attributed to a simple lack of available inventory restricting the normal transaction flow,” according to the report. “However, when viewed alongside a flat or perhaps softening trend for lease rates, it seems like a modest shift in market direction may be in the cards.”
A San Mateo County market report from the first quarter of this year by real estate company Cushman and Wakefield strikes a similar tone.
“The Bay Area’s commercial real estate market has started to ease off the throttle after several years of record growth,” according to the report. “Overall vacancy still rests at healthy levels and average prices are still climbing, but there is a definite trend: growth is slowing down.”
Considering the market’s ability to thrive from the overall health of the local economy, headlined by the presence of titans in the life sciences and technology industries, experts aren’t projecting a commercial rent crash.
To that end, Allen pointed at continued building in areas such as downtown Redwood City as an indication of the market’s faith in the region’s sustained economic viability.
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The Colliers report agrees established commercial districts are likely strong enough to persevere through any potential market fluctuations, but suggests there may be risks for others.
“There is little reason to expect the highly impacted downtown core markets of Palo Alto, Redwood City, and Mountain View to lose momentum, but the secondary Peninsula locations could soon feel a shift,” according to the report.
Suspicion of softening is apparent in undercurrents as well, according to the Cushman and Wakefield report illustrating the local availability of about 1 million square feet of available sublease space, with more vacancy expected.
“While the prices are still climbing quarter over quarter, they are not climbing as fast as they were in 2014 or 2015, especially now that we have more sublease space coming on the market,” according to the report.
As the market for office space balances, demands for other commercial areas such as accommodations for research and development or industrial businesses thrives. Rates in both markets are at historic highs, according to the Colliers report, while vacancy is rare and investment interest revs.
The county’s research and development space vacancy rate floats around 2 percent while the asking price jumped to $3.60, up from $2.70 this time last year. Industrial space rates enjoyed great gains as well, up 31 cents from this time last year to $1.36 per square foot with vacancy rates bottoming out at 1.6 percent across the county, according to Colliers.
San Mateo County’s reputation as a key cog is the state and nation’s economy is long established and evidenced through the annual gains in the cost of finding business space locally.
While no one is raising questions about the overall health of the market, some commercial experts suggest the middling office gains are worth watching.
“Healthy corrections are needed to avoid larger collapses in the future,” according to the Cushman and Wakefield report. “Right now demand is staying on par with space additions but we will monitor movements closely to see if that balance remains in place.”
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