Market Updates

South Bay Market Report September 2023


As of the third quarter of 2023, the San Jose multifamily market remains somewhat subdued, as the continuing impact of high interest rates and economic uncertainty in the face of tech layoffs and bank failures keeps leasing activity and rent growth in check. Despite recent price declines, the single-family housing market remains expensive. As a result, a significant portion of new households will continue to become renters rather than owners, creating a backstop for apartment demand.


Leasing remains muted in the third quarter of 2023. Tenant demand dampened in the latter half of 2022 amid rising inflation, higher interest rates, and economic uncertainty. For the past 12 months, net absorption currently stands at 2,400 units, compared to the 10-year annual average of 3,100 units. However, a dip in the delivery of new supply to the market has kept vacancy rates in check, and at 4.7%, vacancy is in alignment with the metro’s longer-term average and outperforming the national average, which currently stands at 7.0%.



As of the third quarter, about 7,800 units are under construction, representing 4.9% of the market’s inventory. This uptick in activity is a continuation of 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 26.6%. The vast majority of projects are located along the Caltrain route 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.


Want to get a deeper look into the South Bay Multifamily Market? Download the full Market Report here.

View Our Multifamily Properties Here.



Low utilization of office space has been joined by a new challenge, as tech companies, faced with decreasing valuations and tighter availability of capital, look to reduce costs by laying off staff and cutting back on office space. Looking ahead, continued uncertainty around weak tenant demand, elevated levels of speculative development, and the general economic slowdown present headwinds to both market performance and asset values.


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. As of the third quarter of 2023, most major tech companies have enacted staff layoffs and announced reductions in leased office space. While these layoffs cut across national and global locations, Silicon Valley has seen thousands of job losses. In terms of office absorption, the first months of 2023 have seen lease exits and downsizing outweighing new leasing activity. As of the third quarter, vacancy is 14.0% and the availability rate is 18.9%. 


As of the third quarter of 2023, 6.5 million SF of office space is under construction. The active construction market has seen 1.8 million SF of new deliveries in the 12 months prior to 22Q3. Most of this activity has been owner-build or preleased projects for single tenants. The weaker economic climate has led some developers to pause activity in Downtown San Jose. One of the most notable projects that is now on hold is Downtown West, Google’s massive transit-oriented village near Diridon Station, which started site preparation work in 22Q3. As of the third quarter of 2023, the timing of vertical construction remains under review.

Want to get a deeper look into the South Bay Office Market? Download the full Market Report here.

View Our Office Properties Here.



As with other real estate sectors, strong demand and tight supply have made industrial rents in San Jose among the highest in the nation, second only to San Francisco. However, the rate of growth in rents is currently one of the nation’s lowest. Year-over-year rent growth in the local flex and logistics sectors is running at 0.4% and 3.3% respectively. These figures have declined over the past six months and are below the national average for these subtypes.


Leasing activity in the first half of 2023 was 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 is 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. Vacancy, at 6.5%, remains low in comparison to historical levels. This is primarily due to low levels of new construction and the continuation of the long-term trend to re-purpose older industrial sites for housing and other uses, which results in a net reduction in industrial stock.


Flex space accounts for around 2.0 million SF currently under construction, with most of these projects being the construction of data centers. 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 just 2.0 million SF, which equates to 3.7% of existing inventory in San Jose, compared to 3.6% nationally. New construction activity has increased to a total of 5.2 million SF of industrial space under construction across the entire market, a 20-year high.


Want to get a deeper look into the South Bay Industrial Market? Download the full Market Report here.

View Our Industrial Properties Here.



Divergent forces are shaping the performance of the San Jose retail market in the third quarter of 2023. 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, a combination of population decline and the ongoing growth of non-store retailing have exerted negative pressure on consumer spending at traditional retailers. In addition, high interest rates, tech layoffs, and bank failures are also contributing to weaker consumer demand.


Leasing activity in San Jose slowed over the past year, as high inflation and rising interest rates dampened retail spending and led retailers to adopt a more cautious approach. The uptick in leasing that occurred in early 2022, which included several new grocery store leases, has since abated. While retail net absorption has been relatively robust, the slow rate of leasing so far in 2023 is projected to lead to a reduction in net absorption in the quarters ahead. San Jose’s mall properties have been the most successful at keeping occupancy high, with the mall vacancy rate declining from 6% to 3.4% over the past 12 months. This compares with an average national vacancy rate for mall properties of 9.1%. Vacancy levels for San Jose’s other retail property types generally fall in line with the national average.


New construction activity is mainly focused on creating mixed-use urban villages, with residential, hotel, and office uses above street-level retail. Several of these projects are underway or proposed. Redevelopment of existing retail centers typically involves a reduction in the amount of retail space, whereas new mixed-use projects on industrial sites usually provide a net increase in retail space. As of September of 2023, the amount of retail space under construction in the market is 330,000 SF.


Want to get a deeper look into the South Bay Retail Market? Download the full Market Report here.

View Our Retail Properties Here.

*Source: CoStar

Related Articles