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Technology firm Luminary Cloud recently leased the space at 101 Ellsworth Ave.
With a 23.7% vacancy rate last quarter, San Mateo County’s office market is showing signs of increasing demand but not enough to demonstrate a substantial recovery.
The area’s vacancy rate was higher than last year’s first quarter, which was about 21.5%. Net absorption, which measures the difference between leased and vacated space, was -425,650 square feet last quarter.
Gary Baragona, vice president of research at Kidder Matthews, said he is seeing similar trends in the second quarter thus far.
“There is a similar trend happening in Q2 that we saw in Q1, not just in San Mateo County, but other markets throughout the West Coast,” Baragona said. “There is a bit of uncertainty with the economy … so we are seeing a lot of tenants that don't need to make a decision taking a wait-and-see approach to see what will happen over the next couple months.”
Even though demand is inching up, with more back-to-office policies and an artificial intelligence boom, vacancy rates are also elevated due to more developments finishing construction and adding to the supply.
“The demand fuels new development, and those new developments are being built, in theory, to have space for those companies to grow into,” Baragona said. “But when demand slows down, you can't just pause your development. You have to bring those to completion, so it adds to the supply.”
Even though Class A spaces had high vacancy rates last quarter, Baragona said that was likely attributable to more of those buildings coming to the market.
Demand could accelerate as more venture funding inches up, but calculating demand based on venture funding trends is more obscure than it was even a few years ago — not just due to hybrid work policies but also a change in hiring patterns of AI companies, which often put a higher share of investment toward compute power, not necessarily new hires.
“Previously, we definitely saw a very strong correlation between venture funding and growth, such as life science growth,” Baragona said. “But it’s harder to calculate how much space a company is going to need now, and it's harder to find what that correlation is.”
Some of the largest lease transactions last quarter included Burlingame’s new City Hall location at 1440 Chapin Ave. and technology firm Luminary Cloud’s space at 101 Ellsworth Ave. in San Mateo. Redwood City has some of the largest office projects under construction, one at Elco Yards on El Camino Real and another at Broadway Plaza.
“We’re positive about the office market in the Peninsula, but we’re cautious at the same time,” Baragona said. “We do see signs of activity picking up, but I really want to see consistency month over month before I’m ready to say we’re on our way back, and right now there is too much uncertainty in the market.”
(650) 344-5200 ext. 102
(650) 344-5200 ext. 102
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