Economic Turmoil Hits Silicon Valley R&D Leasing

Research and development tenants in Silicon Valley have vacated more space than they leased for the last three quarters in a row, an indicator of sustained economic uncertainty and its impact on leasing decisions among these companies.

In the first quarter, the R&D market in Silicon Valley experienced net negative absorption of 591K SF and vacancy crept up to 9.8%, according to CBRE. New vacancies in Fremont and Newark made up more than half of the negative absorption total, with five subleases contributing 323K SF, CBRE said in its report. 

“Interest rates have more of a negative impact than even Covid did for the R&D-type space,” CBRE Executive President Mark Christierson said. “Companies are going to start to evaluate how much space they really need as they look more closely at the expense side of profits and losses.”

After a rough leasing patch during the early days of the pandemic, R&D space in Silicon Valley recovered, but macroeconomic factors that set in during the second half of 2022 reversed that trend. The kinds of technology companies that dominate Silicon Valley tend to be more concerned with expenses in a high-interest environment, Christierson said.

“Typically the biggest expenses are real estate and labor,” he said. “So you are seeing layoffs and the shedding of space.”

Still, Christierson said, the sector is healthy in Silicon Valley, particularly when compared to office property. He considers the roughly 10% vacancy rate a “stabilized market.”

“Supply and demand are still in equilibrium,” he said. 

That’s one of the reasons asking rates have remained stable at approximately $2.90 per SF before and through the pandemic. Landlords also have stopped short of providing concessions, despite the recent dip. Vacancy rates would have to reach the levels one sees in the office market in Silicon Valley, where as much as 25% of the office space is empty, before a material shift in price, Christierson said. 

“It doesn’t mean it won’t get there, but it hasn’t got there yet,” he said. 

Certain areas like North San Jose and Santa Clara are experiencing a little higher vacancy rates, with both a smidge above 13% but it is not enough to move the needle on asking rates. 

“Those are the two largest submarkets area-wise so they’re naturally going to have a little higher vacancy levels right now,” he said. 

Beyond the data, there is good news in patches for the R&D market during this decline. 

Tesla opened a global engineering headquarters in Q1 2023, which represented 300K SF of R&D space in Palo Alto. Four other deals, all of which exceeded 100K SF, also occurred during the quarter, including Alom Technologies taking down about 100K SF in Fremont and Intuitive Surgical gobbling up roughly the same amount in Santa Clara. 

“It’s hard to say what is going to happen, but right now, we’re in a healthier market in R&D than we are for office space,” Christierson said.