Office market coming back

“It feels like companies are getting people back or at the very least planning to get people back,” CBRE Executive Vice President Simon Clark said. “The general consensus is that there is a vulnerability of the workforce. There’s been a lot of layoffs in the last couple years … so suddenly employers are able to convince their employees to come back to work, and that’s creating a stronger office market.”

While the office vacancy rates on the Peninsula are faring better than the previous two quarters, it’s still slightly up from last year’s third quarter — indicating a slow recovery. But Clark said on-the-ground sentiment is optimistic. A CBRE report also showed that last quarter was the first time since the end of 2022 that realized positive net absorption, which is when the amount of space that is leased is greater than the amount that becomes available. It also noted that the software industry was responsible for the most leasing volume last quarter, comprising almost half of the top 25 tractions. IXL Learning signed the largest lease signed last quarter on Mariners Island Boulevard in San Mateo.

“The year started off very slow, no big surprise,” Clark said. “What we’ve seen in the back half of this year is a significant change. We’re seeing demand increase, mostly from large users, from publicly traded corporations.”

Vera Therapeutics signed the third-largest lease on the Peninsula last quarter, but the life science real estate market, which typically requires research and development infrastructure, is still seeing a more sluggish comeback. Biotechnology firms require more funding to get up and running and are more susceptible to high-interest-rate environments. While there has been a recent return of venture capital funding to the industry, it takes a much longer time for those companies to grow, as they are driven largely by research and lengthy clinical trials.

“It is slower and softer than the office market today. All the indications are that the life science market will come back and will come back strong, but it just needs a little bit more time,” Clark said.

Despite its recent progress, the office real estate market has been hurting for a longer period of time than biotech, he added.

Demand for life science space was high pre-pandemic, which set off a number of construction projects, though due to the COVID-19 delays and a tougher lending market, many of those developments are just now getting completed, which affects the vacancy rate.

“The delivery of new product is raising the vacancy rate and will continue for a few more quarters,” Clark said. “There’s a lot of new construction in the [Highway] 101 corridor… so the building stock increases. That is artificially pushing up the vacancy rate on the life science sector. With that said, the actual leasing activity is low, but it’s steady.”

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