Downtown San Jose office construction drought lifts as tech scouts places to grow

When Adobe broke ground on its new office tower in downtown San Jose last year, it marked the end of a decade-long drought for office construction in the city’s downtown, and now things are only speeding up.

Next week, developer Boston Properties is set to break ground on Platform 16, a 1.1 million-square-foot office development near Diridon Station, and the third building to get under construction in the urban core in recent months. San Francisco-based Jay Paul also started construction on its 19-story office project at 200 Park Ave. last year.

The renewed interest in San Jose is being driven by what Lena Tutko likes to call “GAFA,” an acronym she uses for the fastest-growing tech companies in the region: Google, Apple, Facebook and Amazon.

Tutko, the senior research manager for Colliers International, said Google is boosting confidence in San Jose, where the tech titan is planning a massive mixed-use corporate campus.

“What we’ve seen in the downtown market is, once again, where GAFA goes, everyone else follows,” Tutko said Wednesday during the annual Colliers International Trends event at San Jose’s California Theater.

Colliers’ Trends event each year includes forecasts of the national and state economy and predictions about politics from Washington. But Tutko’s focus is closer to home as she weaves through real estate data to tell the story of Silicon Valley each year.

This year, the stars of that story were undeniably San Jose and Google, which is growing fast throughout Silicon Valley and making some of the largest real estate purchases in the country for two years in a row.

In both 2018 and 2019, the Mountain View-based tech titan dropped $1 billion on real estate in one fell swoop, buying up major Silicon Valley campuses. Last year alone the tech giant spent $1.7 billion on real estate in Silicon Valley.

Some of that happened in North San Jose, where Google continues to snap up buildings with baked in options in some deals to buy more in the future.

In all, Google has amassed more than 2 million square feet of space between leases and purchases in the area, making North San Jose its own little “submarket” that real estate insiders are watching closely, Tutko said.

And while San Jose is having an undeniable moment when it comes to developer and business interest, it isn’t the only area seeing a surge as the country enters its longest economic uptick in history, and unemployment dips to just above 2 percent in Silicon Valley.

The unprecedented growth cycle has left many wondering how long the strong market might last, but so far, there’s no end in sight, said Reed Payne, executive managing director for Colliers.

“Here in Silicon Valley, the headlines are about power outages, wildfires, the homeless, the cost of living, the traffic and how long can the Valley’s real estate boom last?” he said. “None of these headlines are totally new in the technical sense of the word but it’s new in that there’s a realization that what we consider the normal real estate business cycle may not exist anymore.”

A growing demand for office space

Across Silicon Valley, more than 12 million square feet of office and research and development space is currently under construction and 70 percent of that is already leased, according to Colliers. When counting all potential developments being mulled, that number jumps to about 73 million square feet of space, though it’s unlikely that all of that will rise.

But demand is high, Tutko said. Businesses are looking around Silicon Valley to lease or purchase a combined 11 million square feet, most of which is for tech companies, she said.

That news comes even as tech giants start to expand outside of the Bay Area on the hunt for new talent and lower costs, a recent CBRE report showed.

Last month, Facebook founder Mark Zuckerberg told attendees at the Silicon Slopes Tech Summit in Utah that he wouldn’t build his social media company in Silicon Valley today as technology advances make starting a business more accessible elsewhere.

“Frankly I think there are a lot of advantages to building a company that are not in such a monoculture,” he said. “The infrastructure in Silicon Valley hasn’t caught up and the housing is way behind and it is getting more congested, so I think there are a lot of reasons it would be stronger to start something in a different place at this point.”

But despite tech companies beginning to look outside of the Bay Area for space, those same companies are also continuing to grow locally — including Facebook, which took over 1 million square feet of space in both Fremont and Sunnyvale last year.

“We’re not seeing that exodus anytime soon,” Tutko said. “So, despite what Zuckerberg is telling folks in Silicon Slopes, it seems like they’re here to stay in Silicon Valley.”

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