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Silicon Valley Rent, Vacancy, and Unemployment

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.

Silicon Valley Office Vacancy Rates, Rental Rates, Unemployment Rate

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Paul March 24, 2009

That broker you are referring to is one of the top broker’s in Silicon Valley in case you didn’t know.

squarefeet March 24, 2009

hmmmm, in that case scratch everything I wrote then.

…..yes I do know. I like a good irony.

Full Service Broker March 24, 2009

Ya…I think the Square Feet Blog definitely knows who that broker is…and I’m glad that brokers like that are “exposed” for their unnecessary interactions with the media. If I were him, I’d avoid any publicity…but he seems to like it, and his awful predictions may very well bite him in the YOU KNOW WHAT!!!

I LOVE the irony…thanks for posting.

REHammer March 24, 2009

“unnecessary interactions”??? don’t be upset the media isn’t calling you for your analysis. i do agree though that predictions made in the media become a part of the public record, so he will come out looking silly if he’s wrong (which I think he is btw).

this site also made their disagreement in writing, so it will also stay in the public record as well, but at least this site’s analysis is backed up by some sort of data, which is what is missing from so many other quotes that the media runs with.

cool chart too.

Full Service Broker March 24, 2009

Thanks, HammerTime…but no one is upset over here. To the contrary…my preference is to AVOID being quoted in the papers…I receive calls all the time and I decline to comment. I do NOT believe I need publicity to gain clientele (and the subject broker we all know doesn’t “need” it either). But for some reason, he seems to volunteer his “economic expertise” waaaay too frequently…and to that end, he can potentially be held accountable.

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