Given the number of companies that are having their employees work remotely both at present and possibly for the long haul, you'd think an inflated market like Silicon Valley would be experiencing its share of decline right about now. But the opposite seems to be true.
While a number of major corporate and tech hubs have taken a hit in the course of the coronavirus pandemic -- notably, New York City and San Francisco -- the Silicon Valley office market is still seeing its share of demand. In fact, Oxford Economics forecasts that the San Jose metro area will realize the highest GDP growth among major U.S. metros in 2021, beating out emerging hotspots like Austin and Seattle.
Trading activity is high
During the last three quarters of 2020, 54 of Silicon Valley's office buildings with a total of 3.3 million square feet traded ownership. Those buildings sold at an average price of $630 per square foot, which actually represents a gain compared to previous quarters. From 2019's third quarter through the first quarter of 2020, 246 Silicon Valley office buildings traded hands at an average price of $610 per square foot. That $20 per square foot growth is largely attributed to the fact that higher quality buildings were sold in 2020.
Leasing activity is slow, but it could pick up soon
Leasing activity has been sluggish in Silicon Valley as more companies assess their office space needs for a post-pandemic world. Many companies will no doubt seek to downsize their office space, or they might even dump it altogether and stick with a remote work setup. As such, in 2020, leasing activity across Silicon Valley totaled just 1.6 million square feet, the lowest level in 12 years. North San Jose and Santa Clara reported the highest vacancy rates in the area at 19.5% and 14.4%, respectively, according to data from real estate services firm JLL.
Not surprisingly, a lack of leasing demand has put pressure on commercial landlords. Though rents haven't dropped substantially -- they've mostly remained flat -- landlords in the area have been offering added concessions in an effort to lure tenants.
But while leasing activity in Silicon Valley may not be so robust right now, it's expected to pick back up once the pandemic comes to an end and it becomes safer to work in an office building setting. And while many tech companies will no doubt continue to let their employees work remotely, those that are more collaborative will likely seek out ways to bring staff back to the office. Some companies, in fact, might seek to expand their offices in light of the pandemic.
It's this very return to the office scenario that's keeping real estate investors interested in Silicon Valley. And while now may not be the ideal time to snag a discount on real estate, it could be a good time to invest in the area nonetheless -- before the post-pandemic office space boom kicks off.
In most markets, there's a good chance office building occupancy rates won't return to pre-pandemic levels for years. But in Silicon Valley, that recovery could happen a lot sooner.