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 Declines
The Silicon Valley office vacancy rate declined meaningfully in the third quarter of 2026, finishing at 17.4%. It has fallen 70 bps from 18.1% last quarter and 170 bps from 19.1% one year ago. The current rate translates to 16.4 million square feet (msf) of space, a decrease from 17.1 msf in the previous quarter, and the lowest figure since the first quarter of 2023. It has consistently remained below 20.0 msf over the last seven quarters, indicating steady improvement. The percentage of sublease space also declined in the third quarter, finishing at 13.5%, a drop of 515,000 square feet (sf).
Sunnyvale experienced the steepest decline in vacancy in the third quarter, decreasing to 10.3% from 13.7% in the second quarter, largely due to the removal of subleases spaces on Enterprise Way. In contrast, North San Jose experienced the steepest rise in vacancy in the third quarter, increasing to 20.7% from 19.4% last quarter. The uptick was due to a 130,000-sf sublease on Bering Drive coming to market.
Small Dip in Asking Rents
Average asking rents decreased slightly in the third quarter, coming in at $5.19 per square foot (psf) on a monthly full-service basis, a $0.03 dip from the second quarter. The Southern Peninsula cities of Palo Alto, Menlo Park, and Mountain View continued to record the highest rents with second quarter numbers at $8.53 psf, $8.39 psf and $6.44 psf, respectively. While rents remain below the previous pre-pandemic highs, the pricing does point to a healthier market dynamic – it has largely been a reflection of leasing activity concentrated in high to moderately priced space, rather than any distress-driven concessions. Rents are forecast to grow gradually as stronger leasing activity meets a shrinking supply of top-tier space.
Gross Absorption Grows
Transaction volume grew 39.0% from just under 3.0 msf in the second quarter to 4.2 msf in the third quarter. Leasing activity through the first nine months of 2026 has already exceeded every full-year total recorded since 2020. Given the current trajectory, 2026 year-end leasing volume is on track to approach, and potentially surpass, the pre-pandemic 2019 total. There were 18 deals over 20,000 sf in the Valley, compared with 21 last quarter. Four of those deals in the most recent quarter were renewals. The submarket with the most significant gross absorption in the third quarter was Sunnyvale, largely due to Google renewing on seven buildings, totaling 2.2 msf. Amazon’s new lease of 318,000 sf at 1000 Enterprise Way also contributed to the elevated number.
Net Absorption Increases
Net absorption for the third quarter increased to positive 607,000 sf, from positive 551,000 sf in the second quarter. Sunnyvale recorded the highest net absorption of the quarter among all submarkets in the Valley at positive 520,000 sf. In contrast, North San Jose experienced the lowest figure at negative 89,000 sf, due to the previously mentioned 130,000-sf sublease space added on Bering Drive.
Two Projects Under Construction
There were two projects under construction in the third quarter of 2026: a 60,000-sf speculative building at 2525 Park Boulevard in Palo Alto, as well as a 364,000-sf build-to-suit for Intuitive Surgical at 950 Kifer Road in Sunnyvale. The latter development serves as a second phase to another 847,000-sf R&D building at the same address, completed in early 2025. Once the office portion is completed, the campus will total 1.2 msf.
