Adobe, Tesla, and Texas Instruments led headlines this quarter. Adobe completed the 4th building in their downtown San Jose HQ campus called Founders Tower, adding 686,000 SF of office space and a ground floor museum. Tesla leased 319,699 SF in Palo Alto which will become its Global Engineering Hub, “effectively a headquarters of Tesla” according to its CEO. Texas Instruments leased 205,744 SF in Santa Clara, adding to its already significant presence. In aggregate, 1.8 million SF of lease transactions occurred this quarter.
However, these metrics cannot overshadow other indicators pointing towards a slowdown. Meta and LinkedIn placed 1.6M SF of sublease space on the market, raising sublease vacancy rates and driving net absorption for Silicon Valley significantly downwards to negative 907K SF. Since Q4 2022, the total vacancy rate increased 90 basis points to 14.1%, and the total availability rate increased 30 bps to 17.2%. The number of lease transactions declined 33.4% since last quarter.
Demand for Class A buildings remains higher than Class B buildings. Vacancy rates for Class A and B buildings are 13.0% and 15.3% respectively. Many companies are still adapting their return-to-office strategies, but the respective trends in Class A vs Class B office vacancy rates reflect the fact that many of our clients are seeking higher quality, amenity-rich buildings, albeit often with a “right-sized” footprint. According to Kastle Systems data on access card swipes, the San Jose metropolitan area had an occupancy of 37.0% at the end of March 2023. Underutilized space and cost-cutting measures contributed to the sublease availability rate increasing to 5.2% in Q1 2023 from 4.7% in Q4 2022.