Multifamily
At the end of the third quarter of 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, allowing the vacancy rate to remain low.
Vacancy
Renter demand for apartments in San Jose remains robust at the end of Q3 2024. While annual net absorption, 2,200 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 2,000 units were delivered over the past year, which is the annual average of 3,100 units over the past 10 years. Accordingly, the vacancy rate remains low, at 4.9% as of the fourth quarter, which is below the metro area’s 10-year average of 5.8%, while also outperforming the national average, which currently stands at 7.9%.
Construction
At the end of the third quarter of 2024, about 6,000 units were under construction, representing 3.8% of the market’s inventory. This is in line with the 10-year average of 6,800 units actively under construction across the metro. However, this development rate is not unsustainable, being generally consistent with the average rate across the nation.
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Office
At the end of Q3 2024, 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.
Leasing
At the end of Q3 2024, despite a few keynote signings, leasing activity in San Jose remains low. 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 the third quarter, vacancy was 16.3%, an increase of 2.3% from a year ago, and the availability rate was 19.4%. Sublease space availability currently stands at 7.0 million SF, an all-time high, although this has remained flat over the past year.
Construction
In recent years, San Jose has been one of the nation’s more active markets for office development. At the end of the third quarter, 3.5 million SF of office space was under construction, representing 2.5% of the market’s existing inventory, well above the national average of 1.0%. San Jose has also seen 2.9 million SF of new deliveries in the past 12 months. Most of this activity has been owner-build or preleased projects for single tenants.
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Industrial
At the end of Q3 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.
Leasing
Annual net absorption of -260,000 SF, combined with 1.7 million SF of new deliveries in the past year, have caused the vacancy rate to increase to 7.8%, equal to the highest rate seen in the past 10 years.
The smaller number of flex leases that have been signed are distributed across a diverse range of industries including healthcare, robotics, cleantech, and information technology; however, lease sizes are in the smaller range, generally under 20,000 SF. The lease deals larger than 50,000 SF that were being signed in the previous two years have been largely absent in the past 12 months. One exception is a new 100,000-SF lease signed by Figure AI in North San Jose in April 2024. The largest flex renewal was also in North San Jose, where Intermolecular renewed 146,000 SF in March 2024.
Construction
Construction of new industrial buildings remains elevated but has recently started to decline from a 20-year high. At the end of Q3 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 economic slowdown, 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.
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Retail
Divergent forces are shaping the performance of the San Jose retail market at the end of Q3 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
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.
Falling consumer confidence and competition from non-store retailing have been ongoing challenges for brick and-mortar retail. Moreover, a shrinking market has also reduced demand. The population of San Jose fell for three straight years after the pandemic lockdowns, which allowed workers to relocate to more affordable locations. However, as of the fourth quarter of 2024, population growth has turned positive in the past year. This should translate to demand-side growth in the coming quarters.
Construction
Like many other mature markets, retail construction in San Jose has been subdued for the past several years. The annual volume of new construction starts has averaged around 200,000 SF over the past five years, less than half the yearly average over the preceding five-year period.
At the end of the third quarter in 2024, the volume of retail space under construction in the market is 250,000 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
