San Jose’s apartment market continues to move towards a more stabilized status after a period of high volatility. Demand bounced back rapidly after the pandemic, as renters made their way back into the San Jose region, resulting in record levels of absorption and plunging vacancy through the first half of 2022. Investors have shown confidence in the market in 2022, and 22Q3 saw the highest quarterly sales volume of the past 10 years. Transaction pricing in San Jose continues to be at one of the highest levels in the nation.
On the back of robust hiring by technology companies, apartment demand in San Jose recovered quickly after the pandemic. Going into 2022, annual net absorption reached an all-time high of 8,700 units, and the vacancy rate, which had peaked at 9.9% in 2020, had dropped to 4.3% by mid-2022. And with an uptick in new deliveries in recent months, vacancy has increased to 5.5%, bringing the current performance in alignment with the metro’s longer-term performance
Construction activity ramped up in 2022 as developers responded to the growing demand for housing by kick starter projects that had been delayed by the pandemic. This uptick in activity is a continuation of the longer trend. High levels of new apartment construction have been easily absorbed over the past decade, with a net of roughly 32,000 market-rate apartments opening during this period, increasing inventory by 25.8%.
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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. Looking forward, vacancy is expected to remain elevated for at least the near to midterm, reflecting the further delivery of new space and cost reduction initiatives of tech companies.
San Jose ranks among the more active markets in the nation for office development. Currently, 7.4 million SF of office space is under construction, representing 5.2% 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 pre leased projects, as well as speculative projects that were successful in finding tenants.
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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 7.0% and 7.7%, respectively. With a relatively small tally of 3.2 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, or likely for the next several years.
There has been 1.1 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 in recent quarters, but that is mainly a reflection of an extremely low level of available space.
With strong demand for logistics and flex properties, the development pipeline has increased, currently standing at 3.2 million SF, which compares to the 10-year average of 1.4 million SF. However, almost all of the 3.2million 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 benefited 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 in22Q4.
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. Grocery stores have been one of the few bright spots in retail recently.
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. 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
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