Downtown San Jose office vacancies hit 10-year high

Downtown San Jose’s commercial vacancy rates are the highest they’ve been in more than a decade, according to a new report.

While development is slowly increasing across the city, real estate agents are struggling to find renters or tenants to fill the spaces. About 24% of commercial space in San Jose was empty during the first quarter of this year, according to the city’s downtown progress report. The report analyzes commercial and residential development, economic vitality initiatives and various cleanliness and community engagement activities. The last time vacancy numbers were that high was in 2010 when office space was 25% vacant.

Nanci Klein, the city’s director of economic development, said reasons for high vacancy rates are from a myriad of factors—a hybrid work schedule and rise in interest rates. This has led to companies downsizing their office requirements.

“A nationwide economic chill driven by high-interest rates has cut the tech growth machine short and crimped real estate development plans,” Klein wrote in the report.

Office space isn’t the only suffering market in San Jose—retail spaces have been vacant for years. At last count in May, downtown had more than 70 vacant storefronts. The city anticipates vacancy rates will continue to increase as offices downsize and tenant leases come up for renewal. There are approximately 75 office leases comprising 525,000 square feet of space that will come up for renewal in the next 18 months, according to the report.

Another reason rates will increase is due to several large projects coming online, including Jay Paul’s 1 million-square-foot 200 Park Ave. office project, which has completed construction and will be on the market soon.

But downtown leaders and local developers are not worried about the vacancy rates.

“We may have hit rock bottom, and we are trending up,” Alex Stettinski, CEO of the San Jose Downtown Association, told San José Spotlight.

Stettinski said commercial vacancy rates shrunk slightly from April to September, though he couldn’t yet provide specific numbers. He also said Cisco might be considering moving into the 200 Park Ave. development.

“It’s just a rumor right now, but if that were to happen it would cut the vacancy rate by 15%,” Stettinski said. “It shows me how quickly things can change and turn around for downtown. I am not worried.”

Joshua Burroughs, chief operating officer of real estate firm Urban Catalyst, said San Jose is an anomaly in that it has so much available commercial space—and soon enough it will pay off.

“Companies here need space fast,” Burroughs told San José Spotlight. “If they just acquired a company or just got a (venture capital) infusion and they need to go hire 500 people, they need space like tomorrow. We have that space available.”

He said office space built in Santana Row during the pandemic sat vacant for years—a move developers thought was foolish—but it ended up almost fully leased.

“Now they look like geniuses,” Burroughs said.

Burroughs and Stettenski said it’s partly a waiting game in San Jose until interest rates go down and the economy improves.

But to make sure commercial development and growth is sustainable, developers, city officials and local leaders say San Jose must simultaneously build more housing downtown.

Homes completed in downtown dropped over the last year, but there are 5,500 homes in the development pipeline, according to the city’s report. Roughly 730 homes are under construction in the downtown area, including a 23-story tower at 600 S. First St. in the SoFA district.

Developers, including Urban Catalyst, are considering turning commercial developments in the pipeline into housing, partly because it’s in higher demand.

There are bright spots in downtown San Jose’s progress, with an increase in sales tax and device counts—a rough measure of foot traffic. After lagging behind the city’s other neighborhoods, downtown’s quarterly sales tax numbers showed a strong recovery in 2022, up 56% from 2020.

Downtown’s foot traffic is up 75% since 2019, according to the University of Toronto Urban Recovery Index, which collects data on cellphone usage to determine foot traffic. This reflects that more people are coming into downtown, despite fewer office workers.

Downtown San Jose is still faring better than other cities, as both locals and visitors are coming into the city from across the country, according to a 2023 State of Center City report that compared 26 U.S. cities.

“For the meantime, (downtown) will be an entertainment district with more restaurants and bars and nightlife opening and that’s fine,” Stettinski said. “But I can’t wait for downtown to be sort of a well rounded mix again, eventually, where we have enough residential mass so that retailers (and office workers) are attracted to come back here as well.”

Contact Jana Kadah at [email protected] or @Jana Kadah on X, formerly known as Twitter.