Market Updates

South Bay Market Report December 2023


Heading towards the end of 2023, demand in San Jose’s multifamily market is softening, as evidenced by falling totals of net absorption in both the second and third quarters. High-interest rates and economic uncertainty in the face of tech layoffs and bank failures have reduced tenant demand, and while vacancy has stayed relatively low, rent growth has slowed, as landlords focus on tenant retention over rent increases. In the investment market, buyers have maintained interest, and transactions continue to close. Pricing in San Jose remains among the highest in the nation.


In the investment market, buyers have maintained interest, and transactions continue to close. Pricing in San Jose remains among the highest in the nation. Accordingly, the vacancy rate remains at around 5.2%, which is lower than the metro area’s long-term average, while also outperforming the national average, which currently stands at 7.5%. The building classes with the lowest vacancy rates are those in the mid- and lower tiers, which have vacancy rates of around 4.9%, whereas 4 & 5 Star vacancy is 6.1%. Net absorption has been entirely in the 4 & 5 Star class, with the lower classes slightly negative, as renters relocate to newer communities with higher specs and amenities.


The market currently has roughly 7,900 units underway. Submarkets experiencing the most development activity include Santa Clara, Sunnyvale, and Mountain View. 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 forecast to recover as the economy improves, and the vacancy rate is projected to see only a moderate increase. Construction starts have fallen sharply in 2023, with economic conditions making construction financing expensive and difficult to secure.

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Up until last year, the market also 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.


As of the fourth quarter, most major tech companies have enacted staff layoffs and announced reductions in leased office space. While these layoffs cut across national and global locations, Silicon Valley has seen thousands of job losses. 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 the fourth quarter, vacancy is 15.2% and the availability rate is 19.0%. Sublease space availability currently stands at 8.0 million SF, an all-time high. On a more positive note, both Google and Amazon signed sizeable lease renewals in the fourth quarter.


As of the fourth quarter, 4.0 million SF of office space is under construction, representing 2.7% of the market’s existing inventory, well above the national average of 1.3%. While speculative office projects have been quick to lease in the past, weakening demand from tech tenants in 2023 is presenting leasing challenges, particularly in Downtown San Jose, where much of the new product is set to deliver. The active construction market has seen 3.7 million SF of new deliveries in the past 12 months. Most of this activity has been owner-build or preleased projects for single tenants. Google continues to build out its campus space, with several projects underway, including Google Landings in Mountain View, and Google Caribbean in Moffett Park.

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As 2024 approaches, San Jose’s industrial market continues to be negatively impacted by subdued demand, as tenants hold back on expansion plans in the face of high-interest rates and uncertainty around economic growth.


Leasing activity has slowed in the past year, particularly for larger spaces. In the logistics sector, few leases above 50,000 SF have been signed, with one or two notable exceptions. While vacancy, at 6.8%, is up by around 80 basis points over the past year, it now sits in line with the historical average for this market. San Jose’s flex inventory operates at a significantly higher vacancy rate (9.8% as of the fourth quarter) than properties in its logistics market, which is somewhat supply-constrained and currently has an aggregate vacancy rate of 3.8%.


In 2023, construction of new industrial buildings increased to a 20-year high. As of the fourth quarter, around 4.8 million SF of new construction is underway. Flex space accounts for around 1.2 million SF currently under construction, with data centers accounting for most of this activity. Several of the leading owner-operators in this sector have projects under construction. These projects are all located in Santa Clara, where the new deliveries will join an existing cluster of data center properties, drawn to the area by the competitive electricity pricing afforded by the city-owned utility company. Logistics space under construction amounts to 1.8 million SF.  The logistics properties under construction are predominantly located at the southern end of the San Jose market in Gilroy and Martinez. 

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In San Jose, as of the fourth quarter, 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 low level of new construction has allowed vacancy to remain relatively low, and net absorption has been positive over the past 12 months, led by grocery stores, auto, and fitness-related uses.  Transaction volume slowed sharply in the past year, as investor interest was dampened by interest rate hikes and economic uncertainty.


Market vacancy still stands at 4.3%. Larger lease transactions include grocery stores and discounters. In June 2023, Capitol Square, a community center east of San Jose secured new leases for Sprouts Farmers Market and Burlington. In August, Apna Bazaar, an Indian farmers market, signed a 28,000 SF lease in Park Town Plaza, Milpitas. Also in August, computer store Micro Center signed a 40,000-SF lease at Stevens Creek Plaza in Santa Clara. San Jose’s mall properties have been the most successful at keeping occupancy high, with the mall vacancy rate declining from 6% to 3.4% over the past 12 months.


As of the fourth quarter of 2023, the amount of retail space under construction in the market is 320,000 SF. Construction is largely focused on infill developments, such as standalone sites for car dealerships or street-level retail as part of larger residential developments. More than half of the current space under construction is related to a Costco that is being developed in West San Jose. The Rise is the proposed redevelopment of the former Vallco Fashion Park in Cupertino, with plans for 2,400 residences, 2 million SF of office space, and 429,000 SF of retail space. Meanwhile, the Related Santa Clara project, located near Levi’s Stadium, includes office, hotel, and residential spaces, as well as 50,000 SF of new retail and dining space in its first phase.

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*Source: CoStar

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