Office vacancies rise in San Mateo County

“I think that what we’re seeing in San Francisco is only 12 or 18 months ahead of what we’re going to see on the Peninsula and in the valley, meaning that there’s a large increase in sublease space hitting the market,” said Ben Paul, vice chairman at Cushman & Wakefield, a commercial real estate brokerage and services firm. 

“That combined with low demand and a rising interest rate market is really going to lead to buildings not being able to make their mortgage and ultimately going to default. And so we’re just now starting to see that on the Peninsula. We’ve only seen a couple, but I think there’s going to be a few more announcements over the next 30 days or so.”

San Francisco’s office vacancy rates are notoriously high, hitting 30% in the third quarter and steadily rising since the pandemic. But while San Mateo County may belatedly mirror the city’s trends, the area’s life science firms also buoy them from the potential volatility of the technology sector, with firms such as Genentech, Gilead and Abbvie heavily contributing to the local economy. In fact, the sector continues to enjoy a significant share of venture capital funding, accounting for about 88% of venture funding in the Bay Area last quarter, according to a Cushman & Wakefield report. Kriya Therapeutics, a Redwood City-based biopharmaceutical company, took first place as the largest venture deal in the United States during the third quarter, raising a $430 million series C round. 

“There’s a lot of diversity in demand in San Mateo County that does not exist in San Francisco and does not exist in Silicon Valley, life science being far and away the biggest component of that,” Paul said. “But there’s also other R&D companies [such as] Impossible Foods, and there’s a lot of auto tech.”

That variance means developers should always design for R&D and not just office space, he added. And the area’s central location between Stanford University and University of California-San Francisco ensures that biotechnology also maintains a strong grip countywide, in addition to the existing life science hub in places like South San Francisco, which appeals to new companies. South City tenant demand within the industry slightly increased since last quarter, according to a recent report from Newmark, a commercial real estate advisory and services firm. 

But despite an overall drop in rent prices, rates for what are considered class A+ buildings — or those considered the most high end in quality and location — are actually increasing, which might skew the perception of the market, as more well-funded firms are willing and able to pay a premium for those buildings, while rents decrease or remain neutral for other classes of buildings.

“It’s going to cause some confusion I think, but, by quite a wide margin, we’ll see a bigger spread between class A+ rents and class A rents than we’ve ever seen,” Paul said. 

Because the county’s commercial market is driven by venture investing, the fourth quarter tends to be busiest in terms of leasing activity, as companies push to close deals by year’s end, he said.