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 significantly elevated, 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 Hits 3-Year Low As Sublease Space Shrinks
The Silicon Valley (the Valley) R&D market closed the third quarter with a significant decline in vacancy, as the overall rate fell to 12.0%, the lowest level since the fourth quarter of 2023, down 80 bps quarter-over-quarter (QOQ) from 12.8% and 100 bps YOY from 13.0%. This equates to approximately 19.2 million square feet (msf) of vacant space, of which 3.5 msf (18.0%) was sublease space. Notably, sublease vacancy declined by 781,000 square feet (sf) (18.4%) QOQ and 1.7 msf (32.7%) YOY. By contrast, sublease space accounted for approximately 13.5% of all vacant space in the Valley’s office sector during the third quarter.
Asking Rates Rise
The overall average asking rate for R&D product across the Valley was reported at $2.99 per square foot (psf) on a monthly triple net (NNN) basis in the third quarter, marking a two-year high, up $0.05 psf QOQ and $0.19 psf YOY. Among all submarkets in the Valley, Palo Alto, Mountain View, and Sunnyvale continued to yield the highest asking rates, with third quarter numbers at $6.08 psf, $4.21 psf, and $3.81 psf, respectively.
Asking Rates (Continued)
Palo Alto recorded the Valley's steepest QOQ increase in asking rate, rising by $0.53 psf, driven largely by marketing adjustments at two properties to reflect current market conditions. The listing for 3419 Hillview Avenue (93,946 sf) was newly priced at $6.75 psf, and the asking rate at 4009 Miranda Avenue (57,124 sf) increased from $6.50 to $8.60 psf. Both R&D buildings were available in full on a direct basis. By contrast, Menlo Park recorded the Valley's steepest QOQ decline, falling by $0.10 psf. Updated marketing for the submarket's largest available space, the entire R&D building at 4045–4055 Campbell Avenue (66,000 sf) in Bohannon Industrial Park, lowered its asking rate from $1.50 to $1.25 psf, marking the second consecutive quarter of price reductions.
Gross Absorption Declines
Gross absorption totaled 2.6 msf in the third quarter (combined leasing and user-sale activity), down 18.2% (570,000 sf) QOQ but up 3.5% (86,000 sf) YOY. There were 34 leases over 20,000 sf signed in the Valley, 17 of which were renewals, compared with 35 leases in the previous quarter. Sales activity totaled $1.7B in the third quarter, with approximately 4.3 msf of R&D space transacted. Seven user sales accounted for 7.2% (308,000 sf) of total sales volume, while 12 investor sales represented the remaining 92.8% (4.0 msf).
Net Absorption In The Black
The third quarter recorded net absorption gains of 1.2 msf, a 1.8 msf improvement from the prior quarter's net absorption losses of 678,000 sf and a 2.0 msf improvement from the net absorption losses of 824,000 sf recorded a year ago. Net absorption reached its highest level in the last two years, following two consecutive quarters of losses. Palo Alto recorded the largest net absorption gains in the Valley at 285,000 sf, largely due to roughly 260,000 sf being taken off the market on Fabian Way. South San Jose closed with the steepest net absorption losses at 31,000 sf.
New Deliveries On The Horizon
There was one R&D facility delivered in the third quarter: a 137,000-sf speculative building at 2000 Trade Zone Boulevard in North San Jose. The building is fully available for lease. Three projects totaling 867,000 sf remain under construction in the Valley's development pipeline, which also includes 3.7 msf of proposed projects. Of those under construction, Applied Materials' 180,000-sf Epic Center build-to-suit at 970 East Arques Avenue in Sunnyvale is expected to complete next quarter. The other two, both in Santa Clara and slated for owner occupancy, are expected to deliver in the first quarter of 2027: Arista Networks' 363,000-sf build-to-suit at 5200 Patrick Henry Drive and NVIDIA's 324,000-sf Phase III campus expansion at 2400 Condensa Street.
