Large Deals Fuel Big Surge in Silicon Valley Office Leasing

If increasing calls for a return to full in-person office work grow into an office occupancy recovery in 2025, we may look back at a new market report from Silicon Valley as the overture to a turnaround.

A market that has struggled this year with hefty office vacancy and availability rates experienced a huge surge in leasing activity in the third quarter as supply shrank.

Leasing activity jumped to 1.7M SF in Silicon Valley in Q3 2024, rising by 1M SF over the previous quarter’s paltry total of 700K SF, the first time in eight consecutive quarters the total has risen over 1.1M and the highest level since Q3 2022, Savills reported.

Office availability rate in Silicon Valley also decreased by 110 bps to 27.6% in the third quarter, down from 28.7% in Q2 2024. The availability rate in Downtown San Jose ticked down slightly to 35.2% from the 35.7% reported the previous quarter.

The upward leap in volume in the third quarter was driven by large deals involving tech giants. The biggest deal in Silicon Valley in Q3 was Apple’s renewal of 233K SF at 420 and 430 N. Mary Avenue in Sunnyvale prelude to these buildings, along with 410 N. Mary Avenue, being put on the market for sale.

The second-largest lease of the third quarter in Silicon Valley involved TikTok parent ByteDance, which subleased six floors encompassing 195K SF from Roku at Coleman Highline in San Jose. Also, Yahoo inked a renewal and expansion deal encompassing 120K SF in Mountain View.

The Apple, ByteDance and Yahoo deals pushed the leasing activity total in the market well over the five-year quarterly average of 1.1M SF.

However, Savills noted that available sublease space in Silicon Valley remains stubbornly high at 7.7M SF, up from 7.6M SF reported in Q3 2023.

The overall average asking rental rate held steady in the third quarter at $5.15 per SF while the average for Class A space in Silicon Valley was $5.29 per SF, a drop of a few pennies from the averages of $5.17 and $5.33, respectively, in the second quarter.

“Many landlords have offered large concession packages such as rental abatement and large tenant improvement allowances in return for keeping their face rents high,” Savills said.

Bargain hunters looking to scoop up heavily discounted office properties in Silicon Valley soon may have a lot of companies on the acquisitions side as a revival of the return to office push picks up the pace of investment sales.

Recent deals for two separate campuses in San Mateo and Santa Clara are harbingers of renewed interest among buyers in the tech hub’s office market, which has been battered by high vacancy rates and plunging office valuations.

Investors in these office assets are placing bets on a recovery that the conventional wisdom in recent months has deemed a long shot sentiment that now appears to be shifting towards a speedier return on investment as momentum for more in-person office work grows.

SC Properties paid $37.5M to buy the San Mateo Gateway Center, a three-building campus encompassing about 235K SF located at 1800, 1810 and 1820 Gateway Drive. The deal represented a discount of more than 50%. The seller, Kennedy Wilson, acquired the property five years ago for $87.5M.

While the Gateway Center currently is about 60% occupied, the new owner expressed confidence in a rebound of the office sector driven by renewed return-to-office mandates.

“We believe in the office sector on the peninsula as a whole and already see ‘return to office’ momentum, which will help in filling any remaining vacancy,” said SC Properties partner Kevin Phillips, in a statement.

In Santa Clara, South Bay Development has acquired The Quad at Tasman for $51M, an office campus featuring seven buildings encompassing 404K SF. The purchase price is barely a third of the $152M that the seller, San Francisco-based TMG Partners, paid for the asset in 2020, not including the cost of an upgrade undertaken by TMG.

The growing return-to-office drumbeat got a major shot in the arm last month when Amazon CEO Andy Jassy announced in a memo that most of the tech giant’s employees will be required to be in the office five days per week starting in January.