Developer digs in on new building near Santana Row as office demand surges

One of the most anticipated office developments in San Jose got underway this week as the first of the planned buildings broke ground across the street from the popular mixed-use shopping center, Santana Row.

The development, dubbed Santana West, has city approval for nearly 1 million square feet of office space, but developer Federal Realty Investment Trust, the real estate company also behind Santana Row, is biting off just a piece of that starting with an eight-story, 360,000 square foot office building and a new parking garage with 1,750 stalls at the corner of Winchester Boulevard and Olin Avenue.

The building is being constructed “on spec,” meaning without a tenant in tow.

“Santana Row’s mixed-use live-work-play environment coupled with its superb Silicon Valley location offer a competitive advantage for recruiting,” said Jan Sweetnam, Federal Realty’s executive vice president and West Coast chief operating officer. “That’s been evidenced by our experience with companies vying to move into our amenity-rich Santana Row campus over the years.”

The move to break ground on the first of two — or potentially three — buildings at Santana West comes after the development spent more than a year on hold due to a heated tit-for-tat lawsuit over its environmental impacts from the city of Santa Clara. The city filed the lawsuit after San Jose officials filed a similar environmental lawsuit over Santa Clara’s massive Related Santa Clara development. Both suits have been settled and both projects are now underway.

In all, Federal Realty anticipates a $300 million investment on the 12-acre site while it works to open its office buildings in 2021 and 2022, even as construction costs rise throughout the Bay Area. Randy Gabrielson, Todd Shaffer and Tracey Solari of Newmark Knight Frank are in charge of marketing and leasing Santana West.

Federal Realty executives have said in earnings calls since the beginning of the year that their decision to dig in before locking in a tenant comes in response to a market with plenty of demand and little new office space to meet that demand.

“This will be one of the few buildings that gets delivered in this window and one of the only buildings that has Santana-Row-type amenities to go along with it,” Jeff Berkes, Federal Realty’s West Coast president, said in a recent earnings call.

Indeed, data from real estate brokerage Colliers International shows there is currently an enormous imbalance between how much space companies are seeking out in Silicon Valley versus what is available.

“Tenant demand for Silicon Valley commercial property is exceptionally healthy,” said Lena Tutko, research manager at Colliers’ Silicon Valley office.

She notes that while companies — primarily in the tech sector — are currently seeking around 12 million square feet of “prime” space in Silicon Valley, only about 6.5 million square feet of Class A office space is available.

Some companies, like Facebook, Google and Apple, have consistently boosted the demand for space in recent years.

But other names on the list of those currently rumored to be on the hunt for office space in the South Bay include data storage company Pure Storage, robotic medical company Auris Health and online hospitality company AirBnB, which opened its first South Bay office in downtown San Jose earlier this year, but teased it would be looking to expand soon.

“As a result of this considerable imbalance (of demand versus available space), average asking rents for Class A office have surged,” Tutko added.

Today prime office space with top amenities in Silicon Valley is leasing for about $5.31 per square foot per month on average, which is up more than 21 percent compared to three years ago, according to Colliers.

And that kind of price increase helps make a risk like investing hundreds of millions of dollars on an office development a little more enticing for companies looking to lock in a tenant — even if they don’t know who that tenant will be yet.

Contact Janice Bitters at [email protected] or follow @JaniceBitters on Twitter.