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A new quarterly report from commercial real estate firm Kidder Matthews shows that San Mateo County has continued to experience a decline in demand for office spaces, resulting in slightly lower commercial rents and higher vacancy rates throughout the county. Despite this clear trend, nearly 1.3 million additional square feet of office spaces are currently under construction in Menlo Park and Redwood City.
The report showed that the direct vacancy rates in San Mateo County are sitting at 17.1% as of June 2024, according to preliminary data from CoStar, a real estate information company. The county’s vacancy rates are nearly three times higher than they were pre-COVID.
“Going forward, the Peninsula office market is expected to face persistent challenges,” states the report from Kidder Matthews. “Limited demand and increasing vacancy rates are likely to put additional pressure on pricing and property values.”
Total availability rates in San Mateo County, which include office spaces that are available or will soon be available for leases and subleases, have increased to 27% as of June 2024. These rates are up from 24% in June 2023, and 11% in 2019.
These trends have led to new office construction slowing, but not completely stopping, according to Kidder Matthews’ report. San Mateo County has seen two new offices open in the first half of this year, which have added approximately 220,000 square feet of office space.
The construction of new office spaces seems to be concentrated in just a few cities: San Bruno, Burlingame, Menlo Park and Redwood City. Each has over 200,000 square feet of office buildings currently under construction, while many other cities on the Peninsula such as Daly City, Brisbane, South San Francisco, Foster City, Belmont and San Carlos don’t have any office buildings under construction.
Menlo Park and Redwood City already have the second and third largest shares of office space in the county, with 7 million square feet and 5.5 million square feet respectively.
‘Adding to the already oversupplied market’
However, Redwood City and Menlo Park are on track to add hundreds of thousands of square feet of office space over the next few years. Redwood City has the largest amount of office space under construction in San Mateo County, at just over a million square feet. This includes the Elco Yards mixed-use development along El Camino Real, which will add about 530,000 square feet of office space to the city, and the Broadway Plaza mixed-use development, which will add another 420,000 square feet of office space.
There are over 295,000 square feet of office space under construction in Menlo Park. This includes the Middle Plaza development, which will add nearly 143,000 square feet of office buildings to El Camino Real, and the Vasara development, which will add just over 34,000 square feet of office space to the city.
The report states that new office building construction is only “adding to the already oversupplied market.”
It is likely that construction is concentrated in these two cities because rent prices for office spaces remain significantly higher than the county average. While the average asking rent per square foot in San Mateo County sits at $5.82, It currently costs an average of $8.55 per square foot to rent office space in Menlo Park, and $6.33 per square foot to rent office space in Redwood City.
Vacancy rates in Menlo Park are lower than the county average, at 14%, and vacancy rates in Redwood City are higher than the county average at 21%. However, total availability rates in both cities are much higher than the county average. In Menlo Park, just over 34% of office spaces are currently available, and in Redwood City 30% of office spaces are currently available.
Despite the negative future outlook on the office market, and the large inventory of available office buildings, there are yet more offices on the horizon for both cities.
Menlo Park has already approved projects that will add approximately 800,000 feet of office space to the city, including Meta’s Willow Village campus project, which is slated to add approximately 800,000 square feet of nonresidential space, and the Menlo Flats project, which will add another nearly 15,000 square feet of office space.
Several other developments have been proposed in Menlo Park, including the controversial redevelopment of the former Sunset Magazine headquarters. If approved as proposed, it would add hundreds of thousands of additional square feet of offices to the city.
Redwood City is in a similar position. The city has already approved several new office building campuses, including the Harbor View project, which will add almost 765,000 square feet of office space; the 1 Twin Dolphin Drive project, which will add approximately 200,000 square feet of office space and the 1201 Main Street mixed-use development project, which would add another nearly 100,000 square feet of office space.
Plans for the Redwood Life development, which would reconfigure an existing office park to add approximately 2.3 million square feet of office and R&D space to the city, are currently under environmental and design review.
Read the full report at tinyurl.com/kidderofficespace2024.
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