Office space shows some life

“There is a huge amount of gross absorption and total transaction volume. Total leasing in our market doubled last year from the year before so that’s a huge indicator of things thawing out and companies committing to space,” said CBRE First Vice President Patrick Reilly. “Having that much volume increase is important for the health of the markets.”

Snowflake signed the largest lease of the quarter, a 773,000-square-foot campus on Constitution Drive in Menlo Park. However, Redwood City's 589,000-square-foot Pacific Shores Center went on the market, tempering any potential vacancy rate reductions.

Many approved developments throughout the county have been stalled as the lending landscape tightened up since 2023, but that is starting to change soon, particularly in downtown corridors near Caltrain.

“My understanding is that there is some easing in that world and more places to find that debt,” Reilly said.

Higher subleasing activity has also added to the additional supply on the market, for both office and life science space. Developing the latter requires lab infrastructure and comes with more stringent building requirements. Unlike technology companies, many life science firms grew during the pandemic, subsequently signing long-term leases for large spaces. Now, they’re putting some of that available space on the sublease market.

“That doesn't necessarily mean these companies are doing poor. In 2020, 2021, because there wasn't any supply, these companies were signing long-term leases and taking more square footage than they needed, so they are putting it on the sublease market now, but the company itself is doing well,” said Joe Cammarata, executive vice president at Kidder Matthews.

According to a Kidder Matthews market report, the life science vacancy rate neared 28% last quarter on the Peninsula. But venture deals have also increased and, coupled with a projected $54 billion in federal funding to the industry this year, demand could continue to expand.

While in-office work policies are a primary driver for the office market, which includes large technology companies, the big market contributors in the life science sector are more complicated. Clinical trial timelines play a major role, and even though scientific roles are typically not remote positions, the research and development often gets outsourced as they grow.

“Scientists have to actually practice in these controlled facilities, so you need scientists to come in to the workspace,” Cammarata said. “Now, what we see as the companies move through their clinical trials, they outsource their science and so once they have their [research and development] component, they can take that to different groups in the Bay Area, out of state or out of the country.”

Reilly said he expects more steady improvements over the next two quarters.

“There are a lot of indicators that show that the market from a landlord’s perspective is much healthier, and we may very well be topping out on the vacancy rate,” he said. “By no means is this a landlord's world; there is just a little bit of better balance between how much control landlords have versus tenants.”

alyse@smdailyjournal.com

(650) 344-5200 ext. 102