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 5.5%, which has shifted from a recent peak of 9.9%. With roughly 12,000 units underway, new developments will place upward pressure on vacancy in the coming quarters, but if demand holds up as it has since 2021, the vacancy rate should remain relatively stable. Investors have shown confidence in the market in 2022, and 22Q3 saw the highest quarterly sales volume of the past 10 years.
San Jose outperformed the national trend in the first half of 2022, as demand remained elevated relative to pre-pandemic norms. However, demand has slowed somewhat in the second half of the year. In the past 12 months, roughly 3,300 units have been absorbed compared to the long-term average of 3,100 units. The vacancy rate is 5.5% after peaking at 9.9% earlier in the pandemic.
Developers in San Jose have been active in response to the 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 12,000 units under construction, representing 7.7% of the market’s inventory. That compares to the 10-year average of 7,200 units actively under construction across the metro.
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San Jose’s office market has proved 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 12.1%, 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. Heading into 2023, the outlook is less rosy, with tech companies pulling back on expansion plans in the face of weaker demand for their services. The current vacancy in San Jose, at 12.1%, remains above the pre-pandemic vacancy rate of 9% in early 2020. Positive net absorption over the past 12 months of 2.6 million SF indicates there is continued solid demand for office space.
San Jose ranks among the more active markets in the nation for office development. Currently, 8.0 million SF of office space is under construction, representing 5.7% of the market’s existing inventory, well above the national average of 1.6%. While speculative office projects have been quick to lease in the recent past, the signs of weakening demand from tech tenants heading into 2023 may present leasing challenges, particularly in Downtown San Jose, where much of the speculative development is set to deliver.
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With available space low and tenant demand strong, year-over-year rent growth in the local flex and logistics sectors is running at 8.1% and 11.6%, respectively. With a relatively small tally of 2.6 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.
There have been 1.8 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.
Despite a strong demand for logistics and flex properties, there is very little new product in the development pipeline. Almost all of the 2.6 million SF of space currently under construction is preleased, and the vast majority is data center space, clustered in the Santa Clara Submarket. Thus, there is little prospect of competitive new supply arriving in the market to put downward pressure on occupancy and rents in the immediate future.
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Heading into 2023, total retail inventory is below its 2020 level, and vacancy is 40 basis points higher, an outcome that reflects a combination of population decline and the ongoing growth of non-store retailing. Leasing activity has been led by grocery stores, auto, and fitness-related uses and has slowed over the course of 2022, resulting in negative net absorption over the past 12 months.
After starting the year strongly, leasing activity slowed during the second half of 2022. High inflation and interest rates have dampened consumer confidence and prompted a more cautious approach by retailers. Over the past 12 months, the market saw negative net absorption of -220,000 SF, with the bulk of the losses occurring in malls and general retailing. Mall properties also saw the biggest decline in occupancy, with the vacancy rate increasing from 5.2% to 6.7% over the past 12 months. Neighborhood and power centers have been more resilient.
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. 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. For example, west of San Jose, Sand Hill Property Company plans to create a neighborhood village by building 1,000 apartment units above its El Paseo de Saratoga shopping center.
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