Economy: San Mateo On The Comeback
San Mateo County nonfarm employment rose slightly year-over-year (YOY) to 416,800 jobs. Total nonfarm employment increased by 4,000 jobs (1.0%) while the unemployment rate fell 20 basis points (bps) to 3.7%. Venture capital funding declined from the first quarter but remained historically strong at $3.9 billion across 106 deals.
Supply: Vacancy Trends Down
San Mateo County's combined office and R&D vacancy rate declined significantly in the second quarter, falling 120 basis points (bps) quarter-over-quarter to 21.1%. North San Mateo County was the exception, with vacancy rising 40 bps to 18.4%, while Central County and South County posted declines of 100 bps and 230 bps, to 21.7% and 21.8%, respectively. Vacancy across these submarkets has fallen over the past year, driven by sizable move-ins tied to increased leasing activity and the withdrawal of several large blocks of available space from the market. R&D vacancy, which represents just 4.2% of total vacancy, dropped 200 bps quarter-over-quarter to 6.7%, with nearly all of the decline attributable to direct space in South San Mateo County.
Pricing: Steady Rents
The San Mateo County overall asking rent held steady at $5.69 per square foot (psf) on a monthly, full-service basis, from $5.70 psf the previous quarter though $0.65 below the peak of $6.34 psf in the first quarter of 2023. Premium space has elevated rents in Class A and downtown markets. The Class A overall asking rent was $6.04 psf, down $0.01 from the prior quarter and $0.14 YOY. With limited new construction in sight, rents in suburban markets will remain competitive, led by leasing demand from AI and other tech verticals.
Demand: AI Start-Ups & Professional Services Grow
Leasing activity finished the second quarter at a modest 660,351 square feet (sf), of which 73% were new deals. North, Central and South San Mateo captured total leasing at 10%, 48% and 42%, respectively. The second quarter had eight transactions over 20,000 sf, accounting for 43% of total leasing. The technology sector commanded leasing at nearly 240,000 sf or 40% of total leasing followed by professional service at over 170,000 sf or 29%. Activity was led by a confidential tenant subleasing 52,642 sf at 1051 Hillsdale Boulevard, East in Foster City. Sunday AI, a robotics company, has grown its footprint by leasing 52,000 sf at 305 Walnut Street in Redwood City. Rounding out the top three, Freshfields renewed and expanded its space at 855 Main Street in Redwood City for 51,300 sf. While total leasing was significantly down from last quarters blockbuster 1.7 million square feet (msf), San Mateo County is on track to record the strongest annual leasing activity since 2019; the average since then has been 2.7 msf.
AI sector demand for space slowed in the second quarter with almost 180,000 sf across 12 deals. Through the first half of 2026, AI leasing totaled over 700,000 sf averaging 23,700 sf with almost all being new leases. Typical deals have involved small to mid-size startups or maturing companies expanding within the market. Since 2024, there have been over 93 deals surpassing 1.3 msf. Additional demand is on the horizon, with 1.4 msf of tenant requirements in search of space throughout the market.
Overall net absorption was positive 464,261 sf for the quarter, up from 209,033 sf in the first quarter. South San Mateo County accounted for the bulk of absorption at 391,139 sf, followed by Central San Mateo County at 102,204; both regions benefitted from large tenant move-ins and space withdrawn from the market. R&D net absorption was positive 107,511 sf, with move-ins concentrated primarily in Redwood City.
