Report: Downtown San Jose businesses move northward as tech keeps Bay Area market hot

Companies in downtown San Jose are getting pushed out as redevelopment hits the city’s center and major companies expand, causing many businesses to head north toward the city’s airport, according to a newly released report.

The report, released Friday by Joint Venture Silicon Valley Institute for Regional Studies and brokerage firm JLL, shows that commercial development — meaning office, industrial and research and development space — is going strong along the Peninsula and in Silicon Valley, with 13 million square feet under construction, a 19-year high, according to the report.

About 13 million square feet of commercial space was under construction between South San Francisco and San Jose. Graphic courtesy of JLL, Joint Venture Silicon Valley Institute for Regional Studies

As the Bay Area enters its 10th consecutive year of economic growth — an unprecedented run — the report offers a rosy outlook for commercial development between South San Francisco and San Jose as well as from Fremont southward. It comes months after a real estate forecast report predicted headwinds for housing developers in the Bay Area.

San Jose, which has seen scarce commercial development over the past decade, is on the verge of a development boom, as office space north of San Jose — in the Peninsula and beyond — fill to the brim and companies look southward to San Jose for expansion space.

Millions of square feet of new commercial development is in the pipeline for downtown San Jose, though no new office space is slated to open this year, aside from The Sobrato Organization’s River Corporate Center at 353 W. Julian St., which is already leased to Santa Clara County.

One of the key redevelopment sites seeing movement in the South Bay city is CityView Plaza, a block-sized mixed-use development that developer Jay Paul Co. is working on demolishing and remaking in to a more than 3 million-square-foot office park.

But first, all of the companies in the multi-tenant complex must move out into a downtown market that currently has an approximately 12 percent vacancy rate, according to JLL data.

“CityView Plaza removed, let’s say about 800,000 square feet from around a 7 million square foot maket, and all the tenants are getting displaced in one go,” said Nick Goddard senior vice president and downtown San Jose guru at Colliers International. “These people had to go quickly and there was no place to put them other than out by the airport.”

Tech giants, transit drive up rents

But San Jose is far from an outlier when it comes to business displacement, said Heather Belfor, Silicon Valley research manager at JLL.

A majority of the office space under construction in the last quarter was pre-leased, and most of it was leased to tech firms. Graphic courtesy of JLL, Joint Venture Silicon Valley Institute for Regional Studies

“A lot of those … more established companies are trying to consolidate their space into campuses so they are snapping up all these large spaces,” she said. “Because of that, it is pushing some of the traditional tenants out of markets.”

Meanwhile, offices closest to transit stations cost, on average, nearly $3 more per square foot monthly to rent than offices away from trains and buses, according to the report.

Offices near transit “are really in high demand because it is easier for talent to get there, and it is also where that talent wants live and work,” Belfor said.

That figure adds up fast for companies in Silicon Valley, where tech giants are regularly scooping up hundreds of thousands of square feet at a time, often before the office buildings are even completed.

Industrial vacancy hits four-year high

One surprise finding in the report is that industrial vacancy rates hit a four-year high during the third quarter this year, reaching 4.16 percent as about 1.8 million square feet came online during the same time.

More than 4.3 million square feet came online along the Peninsula and Silicon Valley during the third quarter of 2019. Graphic courtesy of JLL, Joint Venture Silicon Valley Institute for Regional Studies

Industrial space has been particularly scarce throughout Silicon Valley in recent years as major tech companies snap up warehouse and industrial buildings, often to store supplies for its local offices or to keep products before they’re shipped to customers.

But the recent vacancy spike isn’t a sign that Silicon Valley finally has enough industrial space, said Erik Hallgrimson, vice chairman at Cushman & Wakefield.

“There’s incredible demand for (industrial space) and I would say generally there is not enough,” he said. “That vacancy is going to go down because there are a lot of big transactions that are about to be announced.”

A list of the major developments that opened during the third quarter of 2019. Graphic courtesy of JLL, Joint Venture Silicon Valley Institute for Regional Studies

Contact Janice Bitters at janice@sanjosespotlight.com or follow @JaniceBitters on Twitter.

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