Real estate report reveals Silicon Valley’s weakest office markets

SAN JOSE — Tech layoffs and retrenchments have shoved South Bay office vacancies higher and transformed downtown San Jose and Santa Clara into the region’s weakest office markets.

The worsening vacancy rates in Silicon Valley were a key revelation in a new report for the April-through-June second quarter of 2023 that was issued by CBRE, a commercial real estate firm.

“The office market continued its downward trend in the second quarter of 2023,” CBRE stated in its new report.

During the second quarter, the South Bay’s office vacancy rate was 18%, CBRE reported. That was worse than the 15.5% first-quarter vacancy rate for Silicon Valley as estimated by CBRE. The real estate firm defines the South Bay as Santa Clara County and the Fremont-Newark area for the purposes of the report.

“Many large tech tenants continued to offload their underutilized space,” CBRE researchers stated in the quarterly report.

Yet while the South Bay office vacancy rate is grim enough, it’s far below the mammoth office vacancies that have erupted in the city of Santa Clara and in downtown San Jose.

Downtown San Jose during the second quarter posted an office vacancy rate of 26.6%, which was up from the first-quarter vacancy of 20% for the downtown district.

The spike in office vacancies in downtown San Jose was fueled primarily by the long-expected completion and availability of the 200 Park office tower produced by Jay Paul Co., one of the Bay Area’s most successful and savvy development firms.

Santa Clara’s office vacancy was 26.1 in the second quarter, up from a 25.5% vacancy rate in the first quarter, according to the CBRE report.

Cupertino boasted the strongest office market, at least measured by the vacancy rate. Just 2.6% of Cupertino’s office market was vacant during the second quarter.

Apple’s presence in its hometown of Cupertino — and the tech titan’s inclination to buy office buildings that it already occupies, or intends to fill up — has helped, for many years, to keep office space tight in Cupertino.

Despite Silicon Valley’s ominous increases in office space, some trends have come into view on the horizon that could shore up the region’s shaky office market.

For one thing, tenant demand for office space is on the rise in Silicon Valley, although at levels that are below the norm for the area.

During the second quarter, prospective tenants were scouting for a combined total of 5.5 million square feet in Silicon Valley. That was up from the first-quarter figure of 2.5 million square feet in tenant demand.

The current level, though, is well below the 10-year average of 8 million square feet in tenant demand for office space in the South Bay.

In addition, a growing number of companies appear to be inclined to oblige employes to lessen remote work and spend more time in their offices.

“Some companies implemented more stringent return to work policies that may lead to higher office space utilization,” CBRE stated.