Silicon Valley’s office market is slowing down as companies rein in their growth expectations. Savills Studley’s latest data shows leasing slowed to below 6M SF last quarter compared to 11.6M SF in 2015. Vacancy fell 50 basis points to 8.9% last quarter compared to the third quarter. Class-A vacancy remained flat compared to the third quarter, but was up 130 bps from a year ago. Additional development could increase vacancy heading into 2018.

Bisnow talked with The Sobrato Organization director of leasing and acquisitions Chase Lyman, who will be speaking at an upcoming Bisnow event, about the office market and how The Sobrato Organization is working through the difficulties of this market. Lyman said the biggest concerns of Silicon Valley remain housing affordability and traffic and congestion.

Rent growth will be mixed this year, with some markets reporting increases while others level off, Lyman said.

Overall asking rent rose $3.73/SF during the fourth quarter and is 4.7% higher compared to the previous year, according to Savills Studley. Class-A rents increased 9.8% quarter-over-quarter and increased 11% compared to the end of 2015. Rents have dipped in Santa Clara and North San Jose.

The Sobrato Organization has done all of its commercial development in Silicon Valley and has purchased residential up and down the West Coast. The Sobrato Organization has designed projects for a wide range of markets, including Downtown San Jose, Downtown Mountain View, Redwood City, East Palo Alto and Fremont, Lyman said. Above is a rendering of a four-story 94k SF building at 599 Castro in Mountain View expected to deliver next year.

Lyman said the firm believes it has a competitive advantage in the markets where it is familiar, such as Silicon Valley. With its access to talent, Silicon Valley is a great place to be, he said.

“Nearly all of our projects are mixed-use as we are trying to build housing next to jobs,” Lyman said. “We are always looking for projects that are transit-oriented as well.”

New Developments Face Tougher Conditions

Another 6M SF of new office construction is expected over the next two years, which Savills Studley said will create some leverage for tenants as supply increases over demand. The largest projects in the pipeline are in Mountain View, Santa Clara and North San Jose. North San Jose has 85% of the 5.5M SF new available office space.

Two projects will break ground in North San Jose early this year, including Boston Properties’ 1.2M SF at The Station on North First and Hunter Properties’ 1.5M SF Coleman Highline. These projects, which have not yet found an anchor tenant, according to Savills Studley, could face some tightening market conditions once they deliver.

Tougher financing requirements and a slowing IPO market have affected the value of firms, causing companies to reconfigure their business plans and strategies. More rent growth is expected in hotter submarkets, but won’t be as significant as previously. Rents are dipping in Santa Clara and North San Jose, where landlords are striking more deals.

Businesses are being more mindful of growth and expenditures. Leases over 100k SF were down during the last half of 2016. Companies are no longer grabbing space once it becomes available and fewer leases includ e businesses grabbing more space than they need for fear of overpaying or lacking space once they expand.

Landlords have already increased concessions and have raised tenant improvement allowances in relation to increased construction costs, which can exceed $100/SF. Some tenants are even opting to renovate their existing offices over moving, Savills Studley reports.

Bay Area businesses have turned toward secondary markets like Seattle and Austin if they can’t get the right talent, something Savills Studley also sees as a reaction to the Bay Area pricing.

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