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 4.9%, which has shifted from a recent peak of 9.9%.
San Jose has stood athwart the national trend in 2022, as demand remains elevated relative to pre-pandemic norms. In the past 12 months, roughly 4,200 units have been absorbed compared to the long-term average of 3,100 units. The vacancy rate is 4.9% 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 were well received over the past decade, with a net of roughly 33,000 market-rate apartments opening during this period, increasing inventory by 26.7%.
There are currently about 11,000 units under construction, representing 7.0% of the market’s inventory. That compares to the 10-year average of 7,000 units actively under construction across the metro.
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The vacancy rate in San Jose stabilized in the second half of 2021 and is currently 12.2%, having hovered around the 12% mark over the past year. Robust leasing activity has allowed a large volume of new space to be absorbed.
Current vacancy in San Jose, at 12.2%, remains above the pre-pandemic vacancy rate of 9% in early 2020. Positive net absorption over the past 12 months of 3.2 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. But for the 3.0 million SF of net new office space delivered to the market, vacancy would have moved significantly lower during the past year.
San Jose ranks among the more active markets in the nation for office development. Construction levels remained robust during the pandemic, albeit with lockdown-enforced delays to starts and deliveries. Coming out of the pandemic, several prominent developers were confident enough to initiate construction starts in 2021, which has kept active construction levels steady. 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 1.7%.
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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
San Jose’s flex inventory operates at a significantly higher vacancy rate than properties in its logistics market, which is severely supply constrained and currently has an aggregate vacancy rate of 3.5%. While the local flex and logistics sectors cater to different tenants, both have seen available space decline rapidly for several quarters as 2023 approaches, helping to repair damage that was done from widespread workplace closures and the outflow of residents that took place during the first year of the pandemic.
With available space low and tenant demand strong, year-over-year rent growth in the local flex and logistics sectors is running at 8.8% and 10.9%, 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 retailers faced periodic shutdowns over the past two years, consumer spending regained pre-pandemic levels early in 2021 and consumers have continued to spend in relatively large volumes during 2022. Vacancy rates edged lower in recent quarters, as retail tenants that survived capitalized on pent-up consumer demand.
Retail absorption in San Jose has been mixed, even several years before the pandemic. While new projects have seen healthy leasing activity more recently, the overall struggles of the retail sector and e-commerce’s growing market share haven’t completely skirted San Jose. Nevertheless, San Jose has outperformed San Francisco and East Bay’s retail market in recent quarters, both in terms of vacancy and rent growth. 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.
San Jose’s construction pipeline has expanded once again, driven by the groundbreaking of Related Santa Clara. About 1.1 million SF is currently underway, with around 800,000 SF attributable to this project. Other construction space is spread across several projects, mostly in new lifestyle and neighborhood centers, or new freestanding retail buildings in existing centers.
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