Will downtown San Jose recover from office vacancies?
The loss of office workers downtown hurt the city's economy. Photo by Lorraine Gabbert.

    Office vacancies in downtown San Jose increased during the pandemic, but some say it’s only a matter of time before workers return.

    According to Silicon Valley MarketBeat, which analyzes commercial real estate activity, downtown vacancies rose during the beginning of 2021 from 14.2% to 17%—about 1.5 million square feet—compared to the first quarter of 2020.

    At the start of 2021, occupancy was down and new leasing activity was historically low in Silicon Valley, said Julie Leiker, director of Silicon Valley Research, in a statement.

    “Contributing to this decline is the fact that many companies continue to postpone all but the most essential real estate decisions,” she said.

    The data shows a slowdown of tenants moving into new commercial spaces in the first quarter of 2021. Tenants moved into 5.3 million square feet in 2020, compared with 10.4 million square feet in 2019.

    This decline comes after occupancy growth numbers in 2018 and 2019 reached 2.3 million square feet and 2.4 million square feet, respectively.

    Business vacancies in downtown rose during the pandemic, but city officials remain optimistic about recovery. Photo by Lorraine Gabbert.

    Despite a recent slowdown in occupancy, some organizations are still set to return to the office. Adobe is building its next tower, and a spokesperson for Zoom said the company is committed to maintaining a presence in San Jose.

    Nonprofit community media center CreaTV San Jose last month leased 18,000 square feet of office space downtown on S. Second St. — the former site of a Zanotto’s deli express and TechShop. The organization wants a long-term presence downtown and signed a 10-year lease with two five-year extensions.

    The space inside is slated to be subleased to cultural, arts and media nonprofits, potentially including this news organization. A little less than a third of the space will be used for offices, CEO Chad Johnston said, with the remainder being community driven and connected to technology. He envisions the space being used for hybrid fundraisers, podcasts and YouTube recordings. 

    “As Google comes into downtown as an anchor, we’re trying to reserve accessible, affordable space for community use,” Johnston said. 

    Additional momentum to return to the office could be on the horizon. Santa Clara County in May moved into the less-restrictive yellow tier of the state’s reopening plan, allowing most businesses to operate indoors with minimal modifications.

    Local health officials recently lifted a requirement that businesses maximize the number of teleworking employees. They also said businesses no longer need to impose social distancing protocols.

    As sheltering in place kept employees at home, the need for new office space sharply declined. Photo by Lorraine Gabbert.

    Office of Economic Development spokesperson Elisabeth Handler said downtown will be well positioned to recover as the office market comes back to life. She added that location, price, amenities, new housing and transit access are still selling points post-COVID.

    But not all employees want to return to the office — opting to avoid long commutes in traffic — and this could affect the amount of office space needed in the future.

    “This is definitely among the biggest conversations right now,” Handler said. “What will be the longer term impact of work from home on the office market? From a space utilization standpoint, the jury is out.”

    While there are a few examples of companies going completely virtual, Handler said that’s still pretty rare and that it’s more common to see a hybrid approach.

    “We’re seeing more and more companies plan to transition back to the office,” she said. “It’s possible the amount of office space needed will remain the same, due to social distancing, even if the employee density is reduced. We expect a trend toward more office workers returning to the office as we move forward, as long as virus spread continues to be reduced.”

    The lack of employees in downtown offices affects city finances, as well as foot traffic to downtown businesses and restaurants. Handler said downtown retail, food and service businesses are heavily dependent on office workers, business travelers and convention-goers to spur spending.

    “The less revenue those businesses see, the fewer sales tax dollars flow to the city,” she said.

    Original Gravity, MINIBOSS and Paper Plane co-owner George Lahlouh said he reduced hours at all three businesses due to a decline in patrons.

    “We’ve lost a lot of that downtown happy hour crowd,” Lahlouh said. “All of the office buildings are still empty and out of town travel is all but gone. It will take us a while to recover.”

    Phil Mahoney, commercial real estate broker and vice chairman at Newmark Knight Frank, is optimistic about downtown’s future growth. Photo by Lorraine Gabbert.

    Blage Zelalich, San Jose’s downtown manager, said the decline in sales tax revenue during the pandemic was just shy of 50%. 

    “Our businesses downtown were hit pretty substantially by the shutdown of all of the industries that support their existence,” she said.

    Councilmember Raul Peralez said since downtown has traditionally had higher vacancy rates, its property managers are no strangers to having to market and compete in this environment.

    “I fully expect to see more people continue to work remotely, if even just periodically, than we did pre-pandemic,” Peralez said.

    Phil Mahoney, commercial real estate broker and vice chairman at Newmark Knight Frank, is optimistic about future growth, including 200 Park, a tech-oriented office tower being built downtown.

    Mahoney said he expects to see the number of office vacancies slowly decline, noting that while some employees might continue working from home, the majority will return to the office. He said he’s seeing substantial commercial real estate activity from larger tenants in Palo Alto, Mountain View and Sunnyvale, a precursor for downtown.

    “Every quarter’s better and we’re seeing more and more recovery,” he said. “It just takes time.”

    Contact Lorraine Gabbert at [email protected]

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