SAN JOSE — Silicon Valley’s office vacancy rate has ballooned to what experts describe as a “historic” high level, a fresh indicator of the economic fallout unleashed by the consolidation in the tech sector.
The office vacancy rate in Silicon Valley, defined as Santa Clara County and Fremont, reached 21.6% in the April-through-June second quarter, according to a new report from Cushman & Wakefield, a commercial real estate firm.
“The Silicon Valley office vacancy rate increased significantly in the second quarter of 2023, finishing at a historic high of 21.6%,” Cushman & Wakefield reported.
During the January-through-March first quarter of 2023, the office vacancy in Silicon Valley was 18.4%, according to the real estate firm.
Several forbidding outposts contributed to the grim landscape of the Silicon Valley office market and its sky-high vacancy rates.
Among the weakest markets in the South Bay, according to Cushman & Wakefield:
— San Jose Airport area, a jaw-dropping 42%
— Santa Clara, 32.5%
— Downtown San Jose, 29.9%
— Mountain View, 26.2%
— Campbell, a relatively small office market, 30.7%
Several of these markets, as was the case with Silicon Valley hopped higher to record levels of vacancy rates, the Cushman & Wakefield researchers determined.
The 21.6% Silicon Valley office vacancy rate topped the prior peak of 19.1% in the first quarter of 2010, which was in the wake of the Great Recession of 2008.
Downtown San Jose’s 29.9% office vacancy was well above the prior peak of 25.1% in the third quarter of 2010, the Cushman & Wakefield research team determined.
Mountain View’s 26.2% was a record high, considerably above that market’s previous summit of 20.5% in the third quarter of 2022.
The San Jose Airport area vacancy of 42% soared well beyond the 37.7% vacancy that was the previous high, occurring in the third and fourth quarters of 2022.
While brutally high, the Santa Clara vacancy rate of 32.5% was below the all-time record vacancy of 36.7% set in the July-September third quarter of 2022, Cushman & Wakefield’s research found.
Silicon Valley’s overall vacancy rate, as typically measured by commercial real estate firms, is a combination of office space being offered directly by a property owner and sublease space placed on the rental market by a tenant that is downsizing its footprint.
The increase in the office vacancy rate was driven in part by the completion of the speculative office tower at 200 Park Avenue in downtown San Jose that totals 965,000 square feet, Cushman & Wakefield reported.
Silicon Valley’s overall vacant office space totaled 19.7 million square feet in the second quarter, a jump of 19.4% from the 16.5 million square feet of empty offices in the first quarter.
“Contributing to this increase is the addition of several large blocks of sublease space,” Cushman & Wakefield stated.
The few tenants that are actively seeking offices will likely concentrate on the newer office buildings. That could make older offices less attractive, in the view of Robert Sammons, Cushman & Wakefield’s senior director of research for Northern California and the northwestern United States.
“We have a ‘trifurcation’ of the market occurring where the top tier space will lease due to a flight to quality while the mid-tier will catch some overflow from tenants that may not be able to afford or need the top tier,” Sammons said. Lower-quality offices will become “obsolete” and become candidates for redevelopment, he added.
Despite the ongoing tech layoffs, Silicon Valley’s future remains brighter than other regions, Cushman & Wakefield determined.
“Although the wave of mass layoffs in the software field and the economic downturn will affect all sectors, the impact of the cycle is likely to be diminished in Silicon Valley due to its focus on critical industries such as hardware, semiconductors, and technology infrastructure,” Cushman & Wakefield reported.