Economy: San Mateo Embracing Tech and AI Demand
San Mateo County office-sector employment rose slightly year-over-year (YOY) to 418,500 jobs. Total nonfarm employment increased by 5,900 jobs (1.4%) while the unemployment rate fell 40 basis points (bps) to 3.6%. Venture capital funding declined from the second quarter but was still a healthy $3.4 billion (B) across 101 deals. Deals for the year totaled $11.8B, already surpassing 2025 at $10.4B and only trails the 2021 record high of $20B.
Supply: Future Move-Ins Point to Lower Vacancy
San Mateo County's combined office and R&D vacancy rate declined in the third quarter, falling 40 basis points (bps) quarter-over-quarter to 20.6%. South San Mateo County was the exception, with vacancy rising 60 bps to 22.2%, while North County and Central County posted declines of 260 bps to 15.7% and 30 bps to 21.5%, respectively. Vacancy across these submarkets has fallen over the past year, driven by sizable move-ins tied to increased leasing activity. Over 1.5 million square feet (msf) of scheduled move-ins over the next year made up of over 70% of technology and life sciences tenants would decrease the County’s vacancy to 16.8%, a positive outlook in lockstep with the strong demand for office and R&D space. R&D vacancy closed the quarter at 7.5%, an increase of 80 bps quarter-over-quarter. The county has a limited supply of R&D buildings that fit the requirements for the robotics and AI industry; nearly all buildings are leased that offer a mix of office, R&D, power, docks and parking.
Pricing: Class A Rents Increase in Select Markets
The San Mateo County overall asking rent jumped up to $5.87 per square foot (psf) on a monthly, full-service basis, from $5.70 psf the previous quarter though $0.47 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 and direct asking rent was $6.35 psf and $6.53 psf, respectfully, with Redwood City and Menlo Park recording the highest figures. With limited new construction in sight, rents in suburban markets will remain competitive, led by leasing demand from AI and other tech verticals.
Demand: Leasing Highest Since the First Quarter of 2019
Leasing activity finished the third quarter at 1.8 msf, the highest since the first quarter of 2019 or 29 quarters ago. North, Central and South San Mateo captured total leasing at 10%, 21% and 69%, respectively. The third quarter had 13 transactions over 20,000 square feet, accounting for 80.2% of total leasing by square footage. The technology sector commanded leasing at over 900,000 square feet or 51% of total leasing, with 33% of those being AI companies. Activity was led by Revolution Medicines taking four buildings totaling 660,000 square feet at Pacific Shores Center in Redwood City that Google owns and previously occupied. Box renewed for over 240,000 square feet at 900 Jefferson in downtown Redwood City and Skydio signed a short-term renewal at Clearview Business Park in San Mateo before a scheduled residential redevelopment. The AI and robotics sectors totaled nearly 200,000 square feet and averaged 16,400 square feet; the top five deals were Skydio, Sunday AI, DataologyAI, Diffusion AI, and Skild AI.
AI sector demand for space through the three quarters of 2026 totaled over 1.1 msf averaging 24,800 square feet with 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 125 deals surpassing 1.9 msf. Additional demand is on the horizon, with 3.9 msf of tenant requirements in search of space throughout the market.
Overall net absorption was positive 109,074 square feet for the quarter, down from 494,515 square feet in the second quarter. North San Mateo County accounted for the bulk of absorption at 201,329 square feet, followed by Central San Mateo County at 42,931; both regions benefitted from large tenant move-ins and strong leasing over the past three quarters. R&D net absorption was negative 63,824 square feet, with move-outs concentrated primarily in Redwood City.
Sales: Seasoned Owners Scoop up Quality Offices
Office investment sales remained active during the third quarter, led by Shorenstein Properties’ $84.1 million acquisition of 550 Allerton Street, or approximately $1,097 psf, through a debt assumption and sale, and Invesco Advisers’ $62.2 million purchase of 1400 Veterans Boulevard, or approximately $995 psf. The County of San Mateo acquired 1065 Hillsdale Boulevard, E. in San Mateo for $28.9 million or $250 psf to be an owner-user. Activity remains highly selective, with buyers favoring strong locations, quality, and leasing potential, while value-add buyers continue to target assets available at discounted pricing.
