Market Updates

South Bay Market Report August 2023


Hybrid working will remain a prevalent trend for Silicon Valley employers, and most employees will likely be required to be in an office at least a few days a week. While hybrid working has broadened apartment residents’ search for housing, San Jose remains a desirable place to live, and overarching trends support strong rental housing demand. Investors have maintained interest in the market, and transactions continue to close. Pricing in San Jose continues to be at one of the highest levels in the nation.


San Jose has continuously bolstered its status as one of the most saturated markets for tech employment in the country. Notwithstanding recent layoffs, major tech companies and startups alike are expected to continue to maintain a substantial presence in the metro. Locally headquartered tech titans, including Apple and Google, continue to post substantial profit growth and expand throughout Silicon Valley. Long-term employment forecasts indicate San Jose and the broader Bay Area will outperform national benchmarks. Net absorption currently stands at 1,600 units and the vacancy rate is at 4.9%.


Construction activity has increased, with roughly 8,500 units underway. This is equal to the highest volume of new development in the past 15 years, but it is not by any means an excessive rate when compared to other major markets across the nation. As these new developments deliver, they may place some upward pressure on vacancy in the coming years. However, demand is projected to recover as the economy improves, and the vacancy rate is projected to see only a moderate increase. Submarkets experiencing the most development activity include Downtown San Jose, Santa Clara, Sunnyvale, and Mountain View.

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Until last year, the market benefited from strong growth and hiring by tech firms. Since then, layoff announcements by tech firms have resulted in thousands of job losses in Silicon Valley, although these are just a fraction of the global reductions that have occurred. Weakening demand is impacting rents, with average rent levels moving downward over the past year, and rent growth is forecast to remain negative for the next several years. Investment sales activity has slowed in the past year to about half its long-term average.


An uptick in companies exiting leases or putting space on the sublet market has seen vacancy and availability rise over the past year. As of 2023Q3 vacancy is 13.9% and the availability rate is 19.0%. Vacancy is projected to rise above 16% by the end of 2023 as new speculative space is delivered to the market. Sublease space availability currently stands at 7.2 million SF, an all-time high. Notable tenants including Google, Meta, and LinkedIn have made space available for sublease. One of a small number of tenants expanding its office presence is Pure Storage, a maker of data storage hardware and software, which subleased 328,000 SF in two buildings from Analog Devices in the Santa Clara Square complex.


San Jose is currently one of the more active markets in the nation for office development. Currently, about 7.8 million SF of office space is under construction. Downtown San Jose has the largest share of the current construction pipeline, at around 2 million SF. Developer Jay Paul Company is involved with several projects, including the 1.4-acre 200 Park Ave. site, on which a 937,000-SF office tower is underway. Across the street, Jay Paul has plans to redevelop the nine-building Cityview Plaza, which it acquired for $284 million in 2018, into a 19-story, 3.4 million-SF mixed-use campus.

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As tenants hold back on expansion plans in the face of high-interest rates and recessionary concerns, leasing activity in the industrial market is low. Vacancy rates remain low; however, this is in part due to low levels of new construction. With demand continuing to remain soft as the economy moves towards a possible mild recession later in 2023, vacancy is forecast to move slightly upwards and rent growth is set to remain low over the coming quarters.


Muted tenant demand in 2023 has resulted in negative absorption in the year to date. After two years of positive net absorption, this is a return to the longer-term trend in San Jose, characterized by the redevelopment of industrial sites for other uses, such as office or residential. Vacancy rate sits at 6.1%. Although this is low compared to previous levels, it is a result of low construction levels. New construction of large space industrial properties is currently underway in areas such as Gilroy, to the south of San Jose. However, none of this space has been preleased.


Construction of new industrial buildings has increased to a 20-year high in San Jose. As of the third quarter, around 4.6 million SF of new construction is underway, which is the highest level of the past 10 years and compares to the 10-year average of 1.5 million SF. Strong demand and rent growth have prompted developers to break ground on new projects over the past three years. As a result, around 3 million SF of new space is expected to deliver over the next 12 months. In the heart of Silicon Valley, there are few opportunities for development of logistics properties. Amazon’s recent purchase of a 41-acre manufacturing site in Santa Clara is evidence that logistics companies are prepared to acquire sites and conduct redevelopment projects to expand their networks.

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The investment market has been active in recent years, with a historically high volume of deals in 2022, led by sales of power centers and neighborhood center properties. However, transaction volume slowed sharply in the past year due to investor interest being dampened by interest rate hikes and economic uncertainty. However, smaller deals are continuing to close in 2023, with buyer interest from local private investors and developers.


The market vacancy rate currently sits at 4.5%. Leasing deals that closed in 2023 are primarily independent retailers, many of which are in categories such as beauty and personal care, fitness, fast food, and restaurants. In June 2023, Capitol Square, a community center east of San Jose secured new leases for Sprouts Farmers Market and Burlington. Falling consumer confidence and competition from non-store retailing have been ongoing challenges for brick-and-mortar retail, which has also been impacted by a shrinking market. The population of San Jose has declined since the beginning of 2019, with the trend accelerating during the initial years of the pandemic as workers relocated to more affordable locations.


As of the third quarter of 2023, the amount of retail space under construction in the market remains at 180,000 SF, which is below the five-year annual average of 440,000 SF. Construction is largely focused on infill developments, such as stand-alone sites for car dealerships or street-level retail as part of larger residential developments. There has been very little expansion in brick-and-mortar retail, with total retail inventory no higher than its 2019 level. Fortunately for owners, the absence of new construction has allowed vacancy to remain relatively low.

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*Source: CoStar

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