San Jose’s apartment market has largely recovered from the steep demand and rent losses that resulted from the onset of the pandemic. Renters have made their way back into the San Jose region in 2022 after a robust demand recovery in 2021, leading to the current vacancy rate of 5.6%, which has shifted from a recent peak of 9.9%.
San Jose outperformed the national trend in the first half of 2022, as demand remained elevated relative to prepandemic norms. However, demand has slowed somewhat in the second half of the year. In the past 12 months, roughly 2,400 units have been absorbed compared to the long-term average of 3,100 units. The vacancy rate is 5.6% after peaking at 9.9% earlier in the pandemic.
Developers in San Jose have been active in response to growing demand for housing metro wide. Elevated levels of new apartment construction have been well received over the past decade, with a net of roughly 32,000 market-rate apartments opening during this period, increasing inventory by 26.0%. There are currently about 9,900 units under construction, representing 6.4% of the market’s inventory.
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San Jose’s office market was solid in 2022, with positive net absorption achieved despite significant delivery of new space. The vacancy rate in San Jose stabilized in the second half of 2021 and is currently 12.5%, having hovered around the 12% mark over the past year. Robust demand from established and new tech tenants has allowed a large volume of new space to be absorbed.
The San Jose office market peaked in 2022, having recorded strong leasing and absorption of new space without increasing the vacancy rate. Leasing activity has been impressive. San Jose was 20th in the nation for leasing volume in 19Q3 but improved to ninth in the nation in 22Q3. Positive net absorption over the past 12 months of 1.8 million SF indicates there is continued solid demand for office space. Much of this absorption was related to new construction of campus buildings for Apple, Google, and Meta in the tech hubs of Moffett Park, Mountain View, Central Santa Clara, and North San Jose.
San Jose ranks among the more active markets in the nation for office development. Currently, 8.1 million SF of office space is under construction, representing 5.8% of the market’s existing inventory, well above the national average of 1.6%. Coming out of the pandemic restrictions, several prominent developers initiated construction starts in 2021, keeping active construction levels steady. Recent deliveries include both large self-build and preleased projects, as well as speculative projects that were successful in finding tenants. This has encouraged continued development.
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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. By contrast, in the U.S. as a whole, flex properties only account for around 10% of existing industrial space. Many local flex R&D properties even compete directly with San Jose’s 140 million SF stock of office properties for the same tenants, whose leasing momentum follows the same boom and bust trends within the tech sector.
There has been 1.6 million SF of net absorption of flex space in the past 12 months, as tenants across a diverse range of industries including healthcare, robotics, cleantech, and information technology have expanded. 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.The largest availability is at Almaden Vineyards Wharf, a 458,000-SF distribution property built in East San Jose in 1972, where San Jose Distribution Services leases 166,000 SF.
Over the past 10 years, the net amount of industrial space in San Jose has declined as older industrial buildings are replaced by residential and office uses. Almost all of the 2.9 million SF of space currently under construction is preleased, and the vast majority is data center space, clustered in the Santa Clara Submarket.
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The San Jose retail market has benefitted from strong economic performance in Silicon Valley in recent years. The pandemic-led increase in demand for tech company products and services generated higher wages and incomes for market residents, with median household income increasing from $140,000 in 21Q1 to $175,000 in 22Q4.
Unlike many metros, San Jose saw positive net absorption during the pandemic lockdown, reflecting the delivery of several large build-to-suits for the likes of Whole Foods, Costco, and Safeway in 2020, together with a major expansion at Westfield Valley Fair. The negative net absorption comes despite the strong performance of the San Jose tech industry, which helped grow median household incomes by 25% over the past two years.
One of the most influential retail centers in the market is Santana Row, a mixed-use center located south of Westfield Valley Fair in Santa Clara. An early example of an outdoor lifestyle center, Santana Row has maintained its position over the past 20 years as a popular dining and retail destination and has provided a model for many new projects and redevelopments around the country. In San Jose, the influence of Santana Row is evident in plans to redevelop existing malls and neighborhood centers to create mixed-use urban villages, adding much needed housing and revitalizing retail offers.
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