San Jose’s apartment market has largely recovered from the steep demand and rent losses that resulted from the onset of the pandemic. Remote working will remain a prevalent trend for major San Jose employers, and most employees will likely be required to be in an office at least a few days a week. While that has broadened apartment residents’ search for housing, San Jose remains a desirable place to live, and overarching trends support strong rental housing demand.
In the past 12 months, roughly 3,500 units have been absorbed compared to the long-term average of 3,100 units. The vacancy rate is 5.2% after peaking at 9.9% earlier in the pandemic. San Jose has long been one of the country’s most expensive markets, particularly after a record run of rent increases prior to the pandemic. That hindered the market during the pandemic, but the region remains a highly desirable location to live. In 2021, as the economy reopened and the public health outlook improved, renters started to move back into the region, which boosted occupancy rates deep into 2022.
There are currently about 11,000 units under construction, representing 7.3% of the market’s inventory. Submarkets experiencing the most development activity include Downtown San Jose, Santa Clara, Sunnyvale, and Mountain View. Most projects are located along CalTrains’ route from the Peninsula into Downtown San Jose. Developers have continued to capitalize on the appeal of mixed-use transit areas where easy commutes and complimentary retail uses provide an attractive lifestyle for residents.
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While some employers are beginning to bring workers back into offices in larger numbers, office usage is still well below historical levels. Leasing activity, while improving, also remains below quarterly averages seen before 2020. Overall, though, San Jose’s office market has held up better than neighboring San Francisco, and the most coveted suburban submarkets popular with the world’s largest tech companies remain exceptionally tight.
The vacancy rate in San Jose stabilized in the second half of 2021 and is currently 12.1%, having hovered around the 12% mark over the past year. Positive net absorption over the past 12 months of 3.0 million SF indicates there is continued solid demand for office space. Looking forward, vacancy is expected to remain elevated for at least the near midterm, reflecting the further delivery of new space and continued uncertainty around the risk posed by hybrid and remote working arrangements.
Currently, 9.1 million SF of office space is under construction, representing 6.5% of the market’s existing inventory, well above the national average of 1.7%. Most recent deliveries were speculative projects that were successful in finding tenants, which has encouraged continued development. Geographically, development activity in Mountain View has been robust. Downtown San Jose has the largest share of the construction pipeline, at 2.7 million SF.
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San Jose is a unique industrial market in that just over half of its total stock is composed of flex properties typically catering to high-tech startups and established firms conducting research and development. San Jose has one of the largest industrial inventories in the country, and 297 industrial deals have been transacted in the past year. That was within range of what typical deal flow has looked like in the past five years.
Flex space listed as available for lease has declined by nearly 3 million SF or over 20% here in 2022 as tenants across a diverse range of industries including healthcare, robotics, cleantech, and information technology are expanding. Large lease signings in traditional logistics properties have been rare here in recent quarters, but that is mainly a reflection of an extremely low level of available space.
With available space low and tenant demand strong, year-over-year rent growth in the local flex and logistics sectors is running at 8.6% and 11.4%, respectively. With a relatively small tally of 2.1 million SF of industrial product under construction across the entire market, competition from new supply will not be of major concern for landlords in the coming quarters and likely for the next several years.
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While many markets across the U.S. have struggled to adapt to the adverse effects of online shopping, market fundamentals in San Jose have remained comparatively stable. In addition, retailers in San Jose have benefited from the region’s substantial economic expansion in the 2010s. Even if economic conditions deteriorate, San Jose is expected to experience steady population gains and stable economic growth, powered by the dynamic tech industry, creating a robust consumer base to drive retail demand.
As pandemic restrictions loosened, consumers resumed activities and returned to normalcy, improving the outlook for retail tenants. The vacancy rate in San Jose appears to be stabilizing around 4.4%, one of the lowest rates of any major metro across the country and near the long-run historical average. While new spaces, like Valley Fair Mall, have seen healthy leasing activity, the pandemic has adversely affected overall metro retail leasing. Quarterly leasing activity has improved, registering close to levels seen in 2019 but is below quarterly averages seen from 2015 through 2019.
About 1.1 million SF is currently underway. One of the largest under-construction developments in the metro is in Hollister, an 80,000-SF freestanding retail neighborhood center at the corner of Prospect Avenue and Park Street. The 36-acre Sunnyvale CityLine project is a multiphase project delivering office, retail, multifamily, and public space components, with the potential to transform downtown Sunnyvale, and is located just blocks from the Sunnyvale Caltrain Station. Other construction space is spread across several projects, mostly in new lifestyle and neighborhood centers, or new free-standing retail buildings in existing centers.
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