Office vacancies grow in San Mateo County, VC funding drops  

San Mateo County ended the year with its seventh consecutive quarter of office vacancy increases, with marketwide availability rates slightly above levels last seen during the 2008 financial crisis, according to reports from both Cushman & Wakefield and Newmark. 

The county saw a 19.3% vacancy rate for both office and research and development space last quarter, up from about 11% during the fourth quarter of 2022. A combination of work-from-home environments, a tight funding market and high interest rates throughout 2023 have stalled office deals, said Randy Keller, managing director of Avison Young, a commercial real estate firm. 

Venture capital invested in San Mateo County-based companies last quarter did not offer much room for optimism, with a 22% decrease in capital investment from the third to fourth quarter, and an overall 7% decrease from 2022.  

“VCs play a huge role in San Mateo County as far as funding companies, and with interest rates so high and less mergers and acquisitions, VCs have taken a much more conservative approach, both in the decision to fund a company and the amount in which they will fund a company,” Keller said. “Based on where the economy is, where interest rates are and where deal activity is, they’re going to still be conservative for awhile. I don’t think anyone will change their models significantly over the next couple quarters.”

The largest deal on the Peninsula was the public transit agency SamTrans’ purchase of the Gateway at Millbrae, a 180,000-square-foot building neighboring the BART and Caltrain stations. SamTrans will initially lease the property and has the option to purchase it for $126 million after 30 months. The law firm Davis Polk placed the second-largest deal, leasing 51,000 square feet of office space in downtown Redwood City. 

“Generally you don’t see public agencies in San Mateo County leading the charge,” Keller said. “In a normal year you would see some of the big software tech companies with big campus environments, as well as some of the life science companies. But those deals just haven’t been there.”

Technology firms have continued seeing layoffs, and Meta put over 520,000 square feet of sublease space on the market last quarter. Life science firms are also feeling the pinch, despite “bailing out” technology firms when the market goes south, Keller said. The early pandemic stages saw robust growth for many biotechnology companies, contributing to real estate deals that are now less necessary, as they have significantly downsized over the past year as well.    

“You’re starting to see now that, with those companies, the demand isn’t really there. The supply is going to far exceed the demand,” he said. 

alyse@smdailyjournal.com

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