San Francisco

Changes on the Horizon for Peninsula Commercial Spaces: Fewer Options and a Higher Price Tag

The county reports that nearly all commercial space is being utilized.

Rebecca Greenway

Businesses along the Peninsula looking to expand into new spaces may have a more difficult search as available space is getting more expensive and harder to find.

"We've seen rental rates go up over the past year or two," said Mark Bodie, executive vice president of JLL, a property management company on the Peninsula. "Tenants are expanding, companies are hiring. It's generally good, but it limits options for companies as they want to grow so they have to look a little further." 

Vacancies for commercial space are now at just 3.7 percent. The number of vacant space was at nearly 8 percent last year and more than 16 percent two years ago.

The changing landscape can be seen throughout the Peninsula as new hotel developments respond to increases in business tourism, mature technology companies like Google buy nearly a million new square feet of office space and cities readjust allotments for commercial space in response to new demand. 

The quick change in available space contributed to an increase in costs similar to the early 2000s.

"I hate to say it's different this time, but it kind of is different this time. In 2000, 2001, we had a fair amount of companies that were really well-funded, but based on a business plan that wasn't proven," Bodie said."They were taking more space than they needed today or tomorrow just in anticipation of future growth. So, it was phantom demand."

After the drastic spike in vacant space in 2001, financial analysts wrote that they expected to see a recovery over the next year. However, the fallout subsisted longer than expected.

The 14.5 percent of vacancies in commercial space climbed to nearly 23 percent the following year.

"The office rental market is glutted with space," the analysis showed. "Empty and semi-empty buildings are visible in every community."

The return to higher asking prices and fuller commercial spaces more than 15 years later is a good thing for the Peninsula, according to San Mateo County Controller Juan Raigoza.

"Everything that’s out there is being utilized," Raigoza said. "What that reflects, is that the economy and the jobs are doing well."

The full report by Colliers International, Inc. showed industrial commercial spaces at record highs and the county leading in employment growth within California.

Bodie also emphasized that the increase in price per square foot won't necessarily reflect higher costs for a company leasing space as, on average, companies have readjusted and are also leasing less space per employee than they were 15 years ago.

"This time, we have really healthy companies that are mature, are being very thoughtful about how they utilize their space," he said. "[They] are being more efficient in the square footage that they end up leasing and buying."

Those sentiments were echoed by Andew Tang, CEO of Hero City, a co-working space and incubator in downtown San Mateo.

"They don’t need to have a lot of space. They just need an Ethernet and monitor - and maybe a keyboard." Tang said. "Ten years ago, this idea of incubators and co-working spaces didn’t exist, so people took out spaces that they didn’t need or could handle."

Fueled by a 'millennial mindset,' Tang said shared economy solutions such as Uber and Airbnb have led people to consider co-working offices.

His co-working and incubator space has had a waiting list in recent years, according to Tang, which they attribute to a number of factors.

"We attribute a lot of it to our entrepreneur members looking for a place that is right between San Francisco and Palo Alto," Tang said.

That midpoint has shifted in recent years, according to Tang and the report by Colliers International, Inc., leading Mid-Peninsula cities such as San Mateo and Redwood City to be considered ideal locations.

The demand for Mid-Peninsula commercial spaces have been reported to contribute to shifts in telecommuting trends, residential real estate, traffic and business tourism in the county over the last five years.

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