Downtown San Jose Class-A Office Leasing on the Upswing, Yet Challenges Remain

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Downtown San JoseBy Neil Gonzales

San Jose has traditionally lagged behind its Silicon Valley competitors such as Palo Alto and Santa Clara in capturing the office market. Moreover, downtown San Jose has struggled with one of the highest vacancy rates in the valley over the past few years.

[contextly_sidebar id=”gMg8NnzF1LwMReN5taetNLFtKMwjBGoy”]But office leasing is starting to take a strong hold in downtown San Jose as the district reinvents itself into a diverse urban neighborhood, and the markets up north increasingly tighten.

“The past year, there’s been a lot of leasing downtown, and landlords rightfully have been increasing rents,” said Sethena Leiker, a San Jose-based senior analyst with commercial real estate services firm Cushman & Wakefield of California.

Indeed, rents for Class-A office space downtown have surpassed those in the San Jose airport sub-market and are now in line with Santa Clara’s. As of Dec. 9, the average monthly Class A rent downtown was $3.13 per square foot—a more than 10 percent increase since the beginning of the year—compared to the airport’s $2.88, according to Leiker. In Santa Clara, it’s $3.14.

Vacancy downtown dropped to 17.3 percent in the third quarter from 22 percent for the same period last year, according to a report by commercial real estate brokerage Cassidy Turley.

During this current technology-driven economic boom in the Bay Area, much of the demand for office space has focused on the Palo Alto area because of its concentration of big innovative companies, cutting-edge startups and quality schools.

However, as rents continue to rise while available space dwindles in that part of the valley, the demand is moving south toward downtown San Jose, Leiker said.

“Many of downtown San Jose’s assets are closing in on full occupancy and attracting investment dollars,” an August report by Cushman & Wakefield said. “It is expected that rents will maintain upward momentum as the market continues to attract tenants paddling out of northern submarkets.”

Reflecting that southward shift are recent leases downtown by software companies Xactly and Intacct Corp. totaling 120,000 square feet at the long-vacant Riverpark Tower II, a Class-A building at 300 Park Ave., which is owned and managed by Foster City-based Legacy Partners., a career Web site for the engineering and technology industries, also recently leased 16,000 square feet downtown at 225 W. Santa Clara St. The company liked the location’s access to amenities, Caltrain and the opportunity for building signage, said Sushma Malhorta, founder and CEO of Santa Clara-based tenant-rep firm S5 Advisory, who worked on the transaction for along with team members Yogi Chugh and Dan Haddock.

Ten Almaden, another Class-A building downtown, has drawn plenty of leasing and investment interest. The building’s tenants include investment manager Loring Ward, which signed a long-term lease for about 42,610 square feet. In recent days, KBS Real Estate Investment Trust III, a unit of Newport Beach, Calif.-based KBS Capital Advisors, acquired Ten Almaden from Equity Office Properties Trust for $116.7 million. HFF marketed the property and closed the sale on behalf of the seller.

“Ten Almaden has an outstanding location in San Jose’s downtown core, which is appealing to millennials for a variety of reasons—including its proximity to newly built housing and a dense amenity base” such as San Pedro Square and SAP Center, HFF managing director Steven Golubchik said in a news release. San Pedro Square is downtown’s trendy restaurant row while SAP Center hosts home games of the Sharks professional hockey team, concerts and other events.

Downtown is starting to transform itself from primarily a business district into a mixed-use, walkable neighborhood with new high-density residential projects and efforts to enhance the pedestrian experience and mass-transit connectivity there.

About 2,800 condominiums or apartments are expected to go up in and around downtown the next five years—a far faster pace than the approximately 2,200 units built the last 15 years, according to Bob Simpson, a San Jose-based senior vice president for Cassidy Turley.

That housing spurt should help increase commercial leasing downtown, Simpson said, but hot-and-heavy new office construction may not happen for some time.

As it stands, he and other industry experts say, top-notch Class-A space remains lacking downtown.

The vacancy rate is still a bit too high for developers to commit fully to office construction downtown, said Julie Leiker, the Silicon Valley director of research for Cassidy Turley (no relation to the Cushman & Wakefield senior analyst). “They probably need to see more activity from large tenants,” she added.

But long-term projects such as the ambitious Diridon Station Area Plan could usher in a wave of office construction in the downtown area, Simpson said.

The Diridon plan seeks to integrate transportation; commercial, retail and residential development; sports and nightlife venues; and open spaces within 250 acres just west of downtown. The plan guides growth in that area for the next 30 years and would essentially extend downtown westward.

“Once all the residential is done, including Diridon, that’s going to spawn the next growth phase downtown, including office,” Simpson said. “Right now, we’re still filling [existing] space.”

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