March 24, 2009
I was reading an article yesterday in the Mercury News about Silicon Valley rents that peaked my interest. Another broker who is often quoted, indicated that his expectation was generally that Silicon Valley wouldn’t see vacancy rates like those we saw in 2002, in which some submarkets experienced vacancy rates of 30%:
‘We don’t anticipate this being anything like 2002-2003,’ in which vacancy zoomed to 30 percent and higher in some ‘micro-markets’ like North San Jose, Milpitas and Redwood City, he said, as Silicon Valley shed more than 200,000 jobs.
That caught my interest, because this same broker has the leasing assignment for Jay Paul’s Moffett Towers in Sunnyvale, a market which currently is experiencing office vacancy of 35%+. Now you may say that is only one market, or that is due to all the new development – but I say who cares – Sunnyvale is in the heart of Silicon Valley and it’s still vacancy; if other landlords consider them competition, then it counts. What’s more is that looking back to 2002-2003, the unemployment rate in Silicon Valley peaked at 9.2% in January of 2003.
In January of 2009, the Unemployment Rate in Silicon Valley eclipsed that for the first time since, shooting to about 9.4%, and deteriorated even more in February to a preliminary 9.9%, so it is very likely that unless the economy rebounds, vacancy rates will continue to deteriorate as companies such as Cisco, Sun, EMC, VMWare, Yahoo, and even Google will need to make more cuts.
On top of that, you have M&A activity and an IPO market which is at a standstill. As a result venture capitalists are becoming increasingly selective for new investments, while many previously funded companies are finding it impossible to raise additional funds, and consequently shutting their doors or shrinking dramatically.
A chart below shows vacancy, rents, and unemployment in Silicon Valley. Vacancy rates lag unemployment by about 3-4 quarters. When unemployment hit the low 4’s in Q4 2006, vacancy only bottomed around Q3 2007. When unemployment rates started to rise in 2007 and hit 6% in Q2 2008, you began to see the acceleration over the last two quarters, and again this quarter (forecasted).
When unemployment rates in Silicon Valley went from 4.2% (Q4 2006) to 6.1% (Q2 2008), accounting for the 3-quarter lag, vacancy increased from a low of about 11.4% (Q4 2007) to about 17% (Forecasted Q1 2009), a 5.6% jump. Now you have an unemployment rate at 10%. Draw your own conclusion, but if you assume a 50% correlation to the previous rate of increase, then we should be at a 23-24% overall office vacancy rate in Silicon Valley.
- Q3 2009 Update: Silicon Valley Rents, Vacancy Rate, and Unemployment Numbers
- California and Silicon Valley Unemployment Rate Numbers
- Q4 2007 Leasing Figures Not as Rosy
- Year End Forecast: 27.5% Vacancy, Rents Down by 23.5%
- US Office Vacancy At 5-Year High; Rents Plummet