New Incentive Aims to Spark Office Construction in Downtown San Jose

San Jose, Shea Properties, Ivanhoe Cambridge, Creative Center for the Arts, SV Creates

Downtown San Jose

By Neil Gonzales

Downtown San Jose is seeing plenty of activity in various sectors—entertainment, shopping and dining—with the likes of trendy hotspot San Pedro Square; high-density residential development such as the 643-unit Silvery Towers, which recently broke ground; and office leasing from a slew of technology companies.

[contextly_sidebar id=”PStb1EXtCEOQ4z7lkXekgxqmkeMPsiFr”]Downtown appears well on its way to becoming the vibrant, sustainable urban core that the city has envisioned. Still, one key element remains elusive—top-notch Class A office space.

But the city aims to spur office construction through a new incentive program that targets high-rise development downtown. Recently, the City Council approved the High-Rise Development Incentive, which suspends the collection of construction taxes for a single new tower project for office, research-and-development or non-hotel commercial purpose.

Using similar incentive programs, the city has done a good job encouraging high-rise condominium and apartment development downtown. The city’s efforts plus strong market conditions have brought 4,050 housing units to downtown—either already existing or currently under construction, according to Kim Walesh, San Jose’s director of economic development and chief strategist.

The housing numbers bring the city closer to its goal of having 10,000 units downtown within a few years—a critical mass that could usher in a surge of high-quality office construction in the area, she said.

But in the meantime, city leaders believe a spark is needed, especially while urban centers continue to be in hot demand. “Now the next incentive is to get the next high-rise office building,” Walesh said.

“Today, companies are choosing urban environments to access and attract a talented workforce,” San Jose Mayor Sam Liccardo said in a news release. The city is “experiencing stepped-up demand from employees and businesses to locate in downtown.”

In just the past year, the number of tech companies downtown grew from 70 to more than 110 firms, Walesh said. “A lot of tech companies are looking for space near transit and in the urban core. They want to be close to the talent living in downtown right now.”

According to the city, commercial vacancy rates downtown plunged from 30 percent in 2012 to 13 percent last year.

The average monthly Class A rent downtown reached $3.13 per square foot in early December, a more than 10 percent increase since the beginning of 2014, according to Sethena Leiker, a San Jose-based senior analyst with commercial real estate services firm Cushman & Wakefield of California.

The High-Rise Development Incentive is a one-time program that could reduce office construction costs by $800,000 to $1.5 million and help make a tower project viable in the next two years, the city said in the release. To be eligible for the program, an office project needs to be 150 feet in height or taller and secure building permits before Dec. 31, 2016.

The program is “nice to have,” said Scott Knies, the executive director of the San Jose Downtown Association. “It certainly is going to be helpful to the courageous first one” that breaks ground on a downtown office development.

Knies described that first project as “courageous” given the fact that the last office construction in downtown was Riverpark Tower II, a speculative Class A development built in 2009. “It’s been a while,” he said.

Since then, he said, “a lot of existing space had to be absorbed, including Riverpark. There was also a lot of available space elsewhere in the regional market that needed to be absorbed.”

It has only been lately that the long-vacant Riverpark has been filling up with tenants, including software companies Xactly and Intacct Corp. for a total of 120,000 square feet. Among other recent leases downtown, career Web site moved into 16,000 square feet at 225 W. Santa Clara St. while investment manager Loring Ward signed a long-term deal for about 42,600 square feet at the Ten Almaden building.

The real driver in bringing new office construction downtown is the continuation of falling vacancy rates and rising rents, Knies said.

“We’re certainly getting [development] in the housing [sector], and there are other signs of life in the market,” he said. “We want to see office development join in that party.”

West Coast Commercial Real Estate News