SAN JOSE — Silicon Valley’s tech boom has fueled an appetite for office buildings that is poised to propel the region to its best leasing market in years, new research reports indicate.
The demand for office space appears to exceed the supply of completed properties, according to separate reports from commercial realty firms Cushman & Wakefield and Colliers International. Silicon Valley is defined as Santa Clara County and Fremont.
“Demand is outpacing supply as activity soars for entitled or under-construction properties,” said Lena Tutko, research manager for the San Jose office of Colliers International, in her assessment of the commercial real estate market in Silicon Valley for the third quarter that ended in September. Tutko added, “We are neck and neck with 2017 for leasing activity as of right now.”
The top three office leasing deals — all involving tech or telecommunications firms — of the July-through-September period were Roku, which leased 472,000 square feet at San Jose’s Coleman Highline complex; Splunk, which rented 319,000 square feet at 700 Santana Row in San Jose; and Nokia, which leased 231,000 square feet at 520 Almanor Ave. in Sunnyvale.
In all three instances, the office buildings weren’t complete at the time of the lease, and in two cases, construction hadn’t even begun when the rental deals were concluded, according to Colliers.
And while the transaction was conducted earlier this year, the largest rental deal so far in 2018 in Silicon Valley fits the pre-leasing trend. In March, Facebook rented 1 million square feet in Sunnyvale’s Moffett Towers 2 complex that’s being developed by Jay Paul.
The deal, arranged by Newmark Knight Frank, a commercial realty firm, occurred before construction had begun on the project and potentially two years before the offices would be ready for Facebook workers to move in.
“Notably, approximately two-thirds of the speculative space under construction has already been pre-leased,” said Julie Leiker, Cushman & Wakefield’s market director for Silicon Valley.
Over the first nine months of 2018, 11.6 million square feet of office space had been leased in Silicon Valley, a figure that outpaces the annual leasing totals of roughly 8.5 million square feet for both the full years of 2016 and 2017, according to Cushman & Wakefield.
The previous record for a full year, as calculated by Cushman & Wakefield, was 13.9 million square feet of leasing activity in 2015.
Experts also see a potential boom for downtown San Jose amid plans by Mountain View-based Google to develop a transit-oriented community of offices, homes, shops, restaurants and open spaces near the Diridon train station and SAP Center where 15,000 to 20,000 of the search giant’s employees could work.
Plus, Adobe Systems plans a dramatic expansion of its downtown campus of three office towers with a proposal for a fourth high rise that would enable the cloud services company to double its workforce by adding 3,000 employees in its headquarters complex.
Over the 12 months that ended in September, developers and realty investors, along with Google and Adobe, spent $1.43 billion in purchases of downtown San Jose properties. That’s nearly triple the $484 million spent on downtown purchases over the prior one-year period that ended in September 2017.
“The Google effect has sparked a chain reaction of investors betting on the revitalization of the region in a big way,” setting the stage for a “transformation of downtown San Jose,” according to a third-quarter market report from Colliers International.