Multifamily
At the end of Q2 2024, San Jose’s multifamily market is in good shape. While demand has fallen since the record of 2021-2022, when annual absorption peaked at over 8,000 units, absorption over the past year has exceeded the number of new units delivered, causing the vacancy rate to remain low.
Vacancy
Renter demand for apartments in San Jose remains robust at the end of Q2. While annual net absorption, 1,700 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 1,600 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 4.8% at the end of the second 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%.
Construction
At the end of Q2 2024, about 8,000 units are under construction, representing 5.0% 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 7,100 units actively under construction across the metro. However, this development rate is not unsustainable, being generally consistent with the average rate across the nation.
Submarkets experiencing the most development activity include Santa Clara, Sunnyvale, and Mountain View. Many projects are located along the Caltrain and VTA routes from the Peninsula into Downtown San Jose. Developers have continued to capitalize on the appeal of mixed-use transit-oriented projects, where easy commutes and complementary retail and restaurant uses deliver an attractive lifestyle for residents.
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Office
The San Jose office market is showing signs of improvement over the downturn in performance that characterized 2023. Although downsizings and exits have continued in the past few months, there has also been some significant new leasing activity. However, continued uncertainty around weak tenant demand, elevated levels of speculative development, and the general economic slowdown present headwinds to market performance and asset values.
Leasing
Despite a few keynote signings, leasing activity in San Jose remains low at the end of Q2 2024. The sharp rise in interest rates that started in 2022 hit tech company valuations and led them to prioritize cost-cutting over expansion. Employment in information and other office-using categories has declined. 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 caused vacancy and availability to rise over the past year. At the end of Q2, vacancy was 15.6%, an increase of 2.2% from a year ago, and the availability rate was 19.2%. Sublease space availability currently stands at 6.8 million SF, an all-time high.
Construction
In recent years, San Jose has been one of the nation’s more active markets for office development. At the end of Q2 2024, 3.5 million SF of office space is under construction, representing 3.0% of the market’s existing inventory, well above the national average of 1.1%. San Jose has also seen 3.2 million SF of new deliveries in the past 12 months. Most of this activity has been owner-build or preleased 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. One of the most notable projects now on hold is Downtown West, Google’s massive transit-oriented village near Diridon Station, which started site preparation work in 22Q3.
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Industrial
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.
Over the longer term, the impressive growth of San Jose’s technology sector increased the demand for industrial buildings over the past 30 years. High-tech firms conducting research and development and specialized manufacturing sought out flex properties and data centers. Flex properties constitute over half of industrial real estate in San Jose, compared to only 10% nationally.
Leasing
After two years of demand growth, the San Jose Market saw net absorption turn negative in 2023 and that trend has continued in 2024. 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.
Accordingly, leasing activity is at a historic low, comparable to the trough of the Great Recession in 2009 or the pandemic lockdown in 2020. With a high proportion of flex space, the market has been particularly sensitive to the slowdown in tenant demand in the tech sector, as high interest rates shrink tech company valuations and reduce the availability of capital to fund expansion strategies.
Construction
Construction of new industrial buildings has increased to a 20-year high. At the end of Q2 2024, around 5.1 million SF of new construction is underway, which compares to the 10-year average of 1.5 million SF. Before the current slowdown in demand, strong demand and rent growth prompted developers to break ground on new projects. As a result, around 3 million SF of new space is expected to deliver over the next 12 months.
Flex space accounts for around 1.5 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 1.5 million SF, which equates to 2.7% of existing inventory in San Jose, compared to 2.1% nationally.
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Retail
Divergent forces are shaping the performance of the San Jose retail market at the end of Q2 2024. Since the pandemic, Silicon Valley has seen strong economic growth, 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 has hindered growth in consumer spending at traditional retailers. In addition, elevated interest rates, tech layoffs, and inflation have also contributed to weaker demand growth.
Leasing
Vacancy rate stands at 4.6%. The combination of low levels of new supply and little demand growth suggests no major changes in San Jose’s retail market in the quarters ahead. While vacancy is projected to remain flat, a return to positive rent growth may have to wait until 2025 as the economy improves.
Construction
Like many other mature markets, retail construction in San Jose has been subdued for the past several years. The annual amount of new construction starts has averaged around 200,000 SF over the past five years. This is less than half the yearly average over the preceding five-year period.
At the end of the second quarter, the amount of retail space under construction in the market is 320,000 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.
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*Source: CoStar
