By George Avalos, December 1, 2019
SAN JOSE — In a record-setting splurge of spending, developers, investors and tech companies have gobbled up properties in downtown San Jose, paying out more than $3 billion in three years.
The land rush extends far beyond Google’s head-spinning shopping spree near the bustling SAP Center and aging Diridon train station. If Google dominated the first two years of the buying binge, the last year has marked the arrival of stalwart developer Jay Paul Co., which is eyeing two major projects to create new tech campuses that would reshape the San Jose skyline and fuel downtown activity.
“Google’s planning for a major South Bay campus in the Diridon Station area has triggered a virtual gold rush for downtown real estate,” said David Buchholz, a senior vice president with Colliers International, a commercial real estate firm.
But experts offer one caveat: All that buying needs to be followed with construction.
“We still do not have enough cranes in the air to get the critical mass that we need,” said Erik Hallgrimson, a vice chairman with Cushman & Wakefield, a commercial real estate firm.
The dollar amounts that buyers are investing in downtown San Jose have swelled steadily over three consecutive one-year periods, according to a survey of public property documents by this news organization. And the number of commercial property deals has also increased.
“There has been an amazing amount of interest in downtown San Jose from an investment standpoint,” said Anne Ralston, a senior managing director with Newmark Knight Frank, a commercial real estate firm.
During the one-year period that ended in June 2017, downtown San Jose commercial property purchases totaled $606.3 million, according to Santa Clara County property records. That number nearly doubled to $1.12 billion for the 12-month stretch that ended in June 2018. And commercial purchases in downtown San Jose totaled $1.32 billion over the one-year period that ended on June 30, 2019.
During October and into the first half of November, investors continued to nibble at downtown San Jose properties. Buyers purchased several downtown San Jose sites over those recent weeks, spending a combined $29.6 million, according to this news organization’s review of county documents. Google and Swenson, a big development firm, were among the buyers. “Investor demand often moves in anticipation of tenant demand,” said Will Schmidt, a vice president with CBRE, a commercial real estate firm. “Downtown San Jose has all the ingredients to be the next hot market. It’s the live, work, play idea.”
The investment surge appears to be resting on a sturdy market foundation. Downtown San Jose office rents, which ultimately must buttress the value of office buildings and other properties, are rising, a Newmark Knight Frank survey cited by Ralston shows. Starting in 2017, overall office rents, as well as rents for prime office buildings, have risen every year in downtown San Jose, according to the Newmark Knight Frank research.
“Leasing demand is very strong and is projected to continue, both organically with companies like Sage Intacct, Zoom, and Cohesity, and with newcomers like Google,” Ralston said.
The demand to rent offices in downtown San Jose, combined with rising office rents, are both indicators that land values and commercial building values have marched higher in tandem, experts say.
Class A office rents — rents for modern office buildings — in downtown San Jose averaged $4.74 a square foot in the first quarter of 2019, up 14.5 percent from the same period in 2018, Newmark Knight Frank determined.
Rental rates in downtown San Jose are rising slightly more quickly than in downtown Oakland. However, San Francisco’s office rental rates have galloped ahead of those in the downtown districts of San Jose and Oakland. During the first quarter of 2019, San Francisco’s monthly office rents were $7.26 per square foot, up 19 percent from the year before, according to Collier International research. Downtown Oakland office rents were at $5 per square foot a month, up 14.2 percent from one year earlier, Colliers reported.
In another measure of rising interest in downtown San Jose, the number of commercial property transactions has marched higher during the last two years.
There were 18 commercial transactions over the 12 months that ended in June 2017, 25 during the following 12-month period, and 33 during the one-year period that ended in June 2019.
The trends potentially increase downtown San Jose’s allure as an office market. “One cautionary note. There is a very important distinction between buying activity and actual construction,” Mayor Sam Liccardo said. “We have seen in the past bursts of speculative activity that has not necessarily materialized into development.”
Others agree. “While this is a time of many proposals, we need to convert these plans into construction projects,” said Scott Knies, executive director of the San Jose Downtown Association.
Some of that is under way. Adobe is constructing a new office tower to dramatically expand the size of the cloud services titan’s three-building headquarters campus in downtown San Jose.
Plus, Jay Paul Co., whose holdings include choice redevelopment sites such as Cityview Plaza, has begun construction on a 19-story, 875,000-square-foot tower at 200 Park Ave. that, when completed, would become the city’s tallest office highrise. Together, the two projects would bring the downtown multiple office towers totaling more than 4 million square feet.
“Downtown San Jose seems to be turning a corner, but we need more stuff to be built,” said Hallgrimson. “Jay Paul will fix that.”
On the western edges of downtown San Jose, Mountain View-based Google has proposed a transit-oriented community of office buildings, homes, shops, restaurants, hotel rooms, cultural and entertainment districts, and open spaces where 25,000 people could work.
Opportunity zones in downtown San Jose could spur an additional jump in investment and development on the part of Urban Catalyst and other companies that have created funds for people to invest in properties in the area and gain tax benefits when a site is substantially redeveloped.
“About 18 months ago, we saw the transition starting to happen in downtown San Jose,” said Erik Hayden, managing partner with Urban Catalyst. “We wanted to be able to buy and redevelop properties in a place that is expanding and adding major technology tenants and residents to a downtown urban environment.”
The growing number of companies and individuals pushing ahead with investments and development projects seek to fashion a skyline that will resculpt the look and feel of downtown with rooftops that are more interesting and street-level access that beckons to pedestrians more than the current crop of towers.
“The dollars being spent on acquisitions are not the endgame, these are the beginning stages of what we need to build the new downtown,” said Bob Staedler, principal executive with Silicon Valley Synergy, a land-use consultancy. “We are entering a new phase of development.”