Venture Capital Funding Drops, Though Still Impressive
For the San Jose MSA, the unemployment rate dropped 60 basis points (bps) year-over-year (YOY) closing at 3.8%, while nonfarm employment increased by 18,300 jobs over the same period. Despite these positive numbers, office jobs, particularly within the tech sector, continued to record layoffs in the third quarter, totaling just over 2,200 lost positions.
Venture capital funding into Santa Clara County-based companies closed the third quarter at $14.1 billion (B) in 199 deals, down in both dollars and deals from $21.2B in 217 deals in the second quarter. That said, funding remains well above the historical average, with the year-to-date figure closing at $43.1B. The largest deals in the third quarter were Tenstorrent (Santa Clara) with a $1.3B funding round, followed by River AI (Palo Alto) with a $1.1B funding round.
Vacancy Ticks Higher, Though Sublease Space Declines
The overall industrial vacancy rate across all sectors in Silicon Valley (the Valley) closed the third quarter at 6.5%, equating to approximately 7.8 million square feet (msf) of vacant space. Vacancy increased by 20 bps quarter-over-quarter (QOQ) from 6.3% and 80 bps YOY from 5.7%. Despite the slight rise in vacancy, the figure for industrial remained in the single digits and well below office (17.4%) and R&D (12.0%) levels. The warehouse sector continued to have a higher vacancy rate than the manufacturing sector, with rates at 6.6% and 6.4%, respectively. The Morgan Hill/Gilroy submarket maintained the highest vacancy rate, at 11.6%, translating to 1.1 msf of industrial product in the third quarter. Sublease vacancy totaled 868,000 sf in the third quarter, down 178,000 sf (17.0%) QOQ; it accounted for 11.1% of total market vacancy.
Asking Rates Edge Up
The overall average asking rate for industrial product across all sectors in the Valley closed the third quarter at $1.68 per square foot (psf), on a monthly triple net (NNN) basis, up $0.05 psf (3.1%) QOQ and $0.08 psf (5.0%) YOY. The average asking rates for the warehouse and manufacturing sectors both closed higher, settling at $1.56 psf and $1.76 psf, respectively.
Gross Absorption Eases
Deal activity eased in the third quarter with gross absorption (combined leasing and user-sale activity) at approximately 3.1 msf, down 177,000 sf (5.4%) QOQ but up 668,000 sf (27.7%) YOY. There was 979,000 sf of renewal activity recorded in the third quarter. Sales activity during the quarter totaled approximately 1.9 msf, with 703,000 sf of warehouse product and 1.2 msf of manufacturing product purchased. Investor sales accounted for 74.8% of total square footage sold, compared with 25.2% for user sales.
Net Absorption Slows
The third quarter recorded net absorption gains of 29,000 sf across all sectors, down 592,000 sf from the previous quarter’s gain of 621,000 sf and down 165,000 sf from the 194,000-sf gain recorded a year ago. By sector, warehouse recorded losses of 140,000 sf, while manufacturing recorded gains of 169,000 sf. The South San Jose submarket yielded the highest net absorption in the Valley at 234,000 sf, largely driven by PODS’ occupancy of a 104,000-sf warehouse facility at 1959 Monterey Road in the Monterey Business Center. In contrast, the Fremont submarket recorded the steepest net absorption loss among all submarkets, totaling 121,000 sf. This decline was driven primarily by the former Fry’s Electronics building at 43800 Osgood Road, a roughly 150,000-sf warehouse facility, which became vacant in the third quarter.
New Groundbreakings and One Completion
The third quarter concluded with three warehouses and eleven manufacturing buildings under construction, totaling approximately 1.6 msf across the Valley. Of the 14 buildings underway, only four are build-to-suit projects, while the remaining ten are speculative. Two projects broke ground in the third quarter. 760 Jarvis Drive in Morgan Hill is a 44,000-sf speculative warehouse facility with no preleasing activity, and it is expected to complete in the third quarter of 2027. Prologis Bayside, located at 46895 Bayside Parkway in Fremont, is a 203,000-sf manufacturing building being developed as a build-to-suit for Quanta, which preleased the entire building during the third quarter and is expected to occupy it upon completion in the third quarter of 2027. Overall, 342,000 sf of industrial space is projected to be delivered next quarter, of which only 84,000 sf remains unleased.
One project completed in the third quarter, a 294,000-sf manufacturing facility in Oak Creek Business Park at 475 Sycamore Drive in Milpitas. The project is fully vacant and available for lease. Looking ahead, 12 projects totaling 2.4 msf remain in the proposed stage of the development pipeline, with 57.6% of the square footage planned to be speculative and 42.4% designated as build-to-suit.
