Silicon Valley companies are adjusting their need for in-person office spaces as employees remain resistant to returning to the office.

Commercial vacancy rates are rising, despite a resurgence in development, according to a December report from Joint Venture Silicon Valley and commercial real estate firm JLL Silicon Valley. Vacancy rates have increased across various sectors, with 24.6% in labs, 11.1% in research and development, and 4.7% in industrial spaces. The office space vacancy rate reached 21.8% in the third quarter of 2024, up from 19.6% in 2023 and more than doubling from 8.6% in 2019.

The report tracks commercial real estate trends through the third quarter of 2024 in Santa Clara and San Mateo counties, as well as Fremont and Newark.

“This is what I’m calling the paradox of 2024,” said Russell Hancock, CEO of Joint Venture Silicon Valley, in an interview with San Jose Spotlight. “The paradox is that we have a growing economy and less need for space.”

While new developments are increasing, Hancock noted that trends indicate workers are unlikely to return to the office full-time. Employees have been resistant, with a report last year showing that the return-to-office rate in the San Jose metro area is just 40.7%, one of the lowest in the country.

The rise in remote work is one factor, but Hancock also pointed out that many remote workers are employed by Silicon Valley companies but live outside the Bay Area and California. He explained that the high cost of living and housing in Silicon Valley has driven people to work remotely while still benefiting from high salaries and career opportunities. “Now people have found that they can have it both ways,” Hancock said. “They can enjoy the high pay, change the world, and live in a house.”

Though vacancy rates remain elevated, development activity has also increased, reaching a post-pandemic peak in the third quarter. The report estimates that about 9 million square feet of commercial space was built in 2024, up from 6.4 million in 2023.

Hancock said the reason behind the “paradox” of growing development and rising vacancy rates is unclear. He noted that tech companies used to offer employees extensive onsite amenities like gyms and laundry services, but after the COVID-19 pandemic, those companies stopped emphasizing office attendance.

The report also highlighted a continued demand for lab and industrial space, areas that require on-site presence from employees.

Hancock believes that the commercial real estate landscape will continue to evolve. “Right now, we’re in a phase where people are de-emphasizing the importance of physical space and focusing on connectivity and distributed models,” he said. “But we won’t remain in this phase.”

Land use consultant Bob Staedler agrees, predicting that the commercial real estate market will recover soon. He noted that San Jose has seen fewer companies defaulting on loans compared to San Francisco, which is a positive sign.

Staedler believes that existing commercial buildings will likely recover faster than new construction, as companies downsize or move to more affordable spaces. However, he emphasized that it’s still too early to predict what the commercial landscape will look like, as most companies delayed major financial decisions until after the November elections.

“I don’t think we’ll know what the new normal is for at least another year,” Staedler said. “Let’s see if we can get the vacancy rate below 20% and then we’ll be in a better position to forecast the future.”