REAL ESTATE NEWS

The Silicon Valley office market has quickly become a tale of two asset classes. While overall availability remains at a historically elevated level, leasing activity is increasingly concentrated in best-in-class buildings and that momentum is expected to continue.

These properties can meet the needs of AI and other innovation-driven companies, Nu Nandar Aung, research manager of Northern California at Savills, told GlobeSt.com.

Savills' Q1 Office Report showed that the Silicon Valley office market recorded a robust 6.2 million square feet of leasing activity in the first half of 2026. Second-quarter signings alone totaled 3 million square feet, well above the 2 million square feet leased in the year ago period and the five-year quarterly average of 1.5 million square feet.

"The continued 'flight to quality' suggests demand is there; it has become much more selective," Aung said. "That demand has reinforced this trend and shown that occupiers are still willing to make long-term commitments when the space aligns with their talent and business objectives."

At the same time, older office buildings are facing challenges, as economic headwinds linger, creating a much wider performance gap than in previous cycles, Aung said.

"It's a reminder that today's office market isn't being defined by office demand alone, but it's being defined by the quality, location, and functionality of the space," he said.

"Occupiers are beginning to show confidence despite broader economic uncertainty. Rather than waiting on the sidelines, many companies are taking advantage of favorable market conditions to secure high-quality space on attractive terms, signaling that strategic real estate decisions are moving forward even as the market continues to recalibrate."

Because of this, landlords of top-tier assets will likely continue to see greater pricing power, with large block availabilities limited in trophy and Class A+ inventory.

Both the overall and Class A average asking rents continued to trend upward in Q2 2026, reaching new highs of $5.72 and $5.92 per square foot, respectively, with both increasing 6.7% year-over-year.

"While a broad-based recovery will take time, these trends point to improving fundamentals beneath the headline availability rate," he said.

However, Savills said the looming debt crisis continues to weigh on the office market and could result in more assets reverting to lenders, trading at significant discounts or entering foreclosure. Recently, the Mortgage Bankers Association revealed that commercial mortgage debt hit a record, surpassing $5 trillion.

Source: GlobeSt/ALM