Market Updates

South Bay Market Report Q1 2024


In the first quarter of 2024, San Jose’s multifamily market is in good shape. Demand has certainly fallen since the record peak of 2021-2022, when annual absorption peaked at over 8,000 units. However, absorption over the past year has exceeded the number of new units delivered, causing the vacancy rate to remain low. 

The multifamily market in San Jose has seen compelling growth over the past 20 years. The success of Silicon Valley’s tech economy has driven large increases in employment and income and generated strong growth in housing demand. Competition for for-sale and rental housing in the premier Silicon Valley suburbs has pushed housing costs to some of the highest levels in the nation. Average apartment rents are the third highest in the U.S., after New York and San Francisco, while forsale housing is out of the reach of many residents.

Renter demand for apartments in San Jose remains robust in the first quarter of 2024. While annual net absorption, 1,100 units, is a lot less than the post-pandemic peak of over 8,000 units, the past year’s total is not out of line with the level of demand seen in the past decade.

Market vacancy remains relatively low, primarily because supply has not increased at its historic rates. Just 820 units were delivered over the past year, which is less than half the annual average over the past 10 years. Accordingly, the vacancy rate remains low, at 5.0% as of the first quarter, which is below the metro area’s 10-year average of 5.8%, while also outperforming the national average, which currently stands at 7.8%. 

The building classes with the lowest vacancy rates are those in the mid- and lower tiers, which have vacancy rates of 4.7% and 4.6% respectively, whereas 4 & 5 Star vacancy is 5.7%. Net absorption has been entirely in the 4 & 5 Star class, with the lower classes slightly negative, as renters upgrade to newer communities that offer higher specs and amenities.


As of the first quarter of 2024, about 7,600 units are under construction, representing 4.9% of the market’s inventory. This is close to the all-time high level of construction activity and compares to the 10-year average of 7,000 units actively under construction across the metro. However, this rate of development is by no means unsustainable, being generally consistent with the average rate across the nation. 

The uptick in development activity was triggered by strong demand coming out of the pandemic, but it is also consistent with the longer trend. Robust levels of new apartment construction have been easily absorbed over the past decade, with a net of roughly 33,000 market-rate apartments opening during this period, increasing inventory by over 25%. Submarkets experiencing the most development activity include Santa Clara, Sunnyvale, and Mountain View. New projects have leased quickly.

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In the first quarter of 2024, the San Jose office market continues to show signs of the imbalance in demand and supply that first became evident in early 2023. The combination of weakness in tenant demand and an increase in the supply of newly built space has caused vacancies to increase. The market’s vacancy rate is approaching the previous high points established during the dotcom bust and the Great Recession. Rents are trending downwards, and concessions are up.


The San Jose leasing market has slowed over the past year, impacted by the sharp rise in interest rates that has hit tech company valuations and led them to prioritize cost-cutting over expansion. Moreover, tenants continue to reduce their leased space in response to office work’s changed nature and location. While most occupiers have now settled on their space strategy, the process of delivering that strategy continues to play out as leases reach their expiration dates.

An increase in the number of companies exiting leases or putting space on the sublet market has seen vacancy and availability rise over the past year. As of the first quarter, vacancy is 15.8%, an increase of 3.6% from a year ago, and the availability rate is 18.5%. Sublease space availability currently stands at 7.3 million SF, an all-time high.

Leasing brokers have had limited success finding single tenants to take over the whole building and large blocks of sublet space. Several large sublease spaces are now being divided to attract tenants.


In recent years, San Jose has been one of the nation’s more active markets for office development. As of the first quarter, 3.5 million SF of office space is under construction, representing 2.3% of the market’s existing inventory, well above the national average of 1.2%. San Jose has also seen 3.4 million SF of new deliveries in the past 12 months. Most of this activity has been owner-build or pre-leased projects for single tenants.

The weaker economic climate and uncertainty over future demand for office space have led some developers to pause activity in Downtown San Jose. Similarly, several large mixed-use proposed redevelopments, including Related Santa Clara and The Rise in Cupertino, have substantially cut their office components.

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In the first quarter of 2024, 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.

In the year ahead, demand is likely to remain subdued until the economy improves and employers move into a more expansionary mode. With an elevated level of new construction projects completing, the overall vacancy rate is set to rise, although the impacts will be localized, with supply-constrained submarkets remaining much tighter.


After two years of demand growth, the San Jose Market saw net absorption turn negative in 2023. The downturn came as a direct result of the Fed’s action to slow the economy by raising interest rates. Industrial tenants, projecting weaker sales growth, slowed or canceled expansion plans.

Leasing activity 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 7.2%, 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 first quarter) than properties in its logistics market, which is somewhat supply constrained and currently has an aggregate vacancy rate of 5.1%.


As of the first quarter, around 5.1 million SF of new construction is underway, which compares to the 10-year average of 1.5 million SF. Strong demand and rent growth have prompted developers to break ground on new projects over the past three years. As a result, around 3 million SF of new space is expected to deliver over the next 12 months. 

Flex space accounts for around 1.2 million SF currently under construction, with data centers accounting for most of this activity. In the R&D segment, the 847,000-SF manufacturing/research facility being built for Intuitive Surgical at 932 Kifer Road in Sunnyvale is the largest project currently underway. Logistics space under construction amounts to 1.8 million SF, which equates to 3.3% of existing inventory in San Jose, compared to 2.4% nationally. The logistics properties under construction are predominantly located at the southern end of the San Jose market in Gilroy and Martinez.

In the heart of Silicon Valley, there are few opportunities for development of logistics properties. Amazon’s recent purchase of a 41-acre manufacturing site in Santa Clara is evidence that distributors wanting to build out their delivery networks are prepared to acquire sites that require substantial redevelopment.

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Divergent forces are shaping the performance of the San Jose retail market in the first quarter of 2024. Silicon Valley has seen strong economic growth in the years since the pandemic, with increased demand for tech company products and services, generating higher wages and incomes for market residents. However, the combination of population decline and the ongoing growth of non-store retailing have hindered growth in consumer spending at traditional retailers. In addition, high interest rates, tech layoffs and inflation have also contributed to weaker demand growth.


Although high inflation and interest rates have dampened retailer confidence and introduced more caution to their expansion plans, the impact on leasing activity in San Jose has not been severe. While the number of new leases is below the average seen over the past decade, the difference is relatively minor and is a testament to the robustness of consumer spending. Overall market vacancy stands at 4.5%.

San Jose’s mall properties have been the most successful at keeping occupancy high, with the mall vacancy rate staying at 4.7% over the past 12 months. This compares with an average national vacancy rate for mall properties of 8.7%. San Jose’s other retail property types’ vacancy levels generally align with the national average.


As of the first quarter of 2024, the amount of retail space under construction in the market is 390,000 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 being developed in West San Jose. Low levels of new construction has allowed vacancy to remain relatively low, and net absorption has been flat.

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*Source: CoStar

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