San Jose at a Crossroads Again

San Jose, Republic Urban Properties, Michael Van Every, O.C. McDonald, City Ventures, Silicon Valley Leadership Group, SPUR, Full Power Properties, KT Urban
This site was declined by the city of San Jose for residential rezoning.
This site was declined by the city of San Jose for residential rezoning.

San Jose draws line against residential rezoning, betting commercial development will drive economic base.

THIS ARTICLE WAS PUBLISHED IN THE ‘Q’ – THE REGISTRY’S PRINT PUBLICATION – IN JULY 2015

By Neil Gonzales

[dropcap]A[/dropcap]s if San Jose hasn’t been clear enough in recent years about the desire to preserve land for jobs while limiting new housing, it just emphatically put its foot down on the matter.

In May, a majority of the City Council shot down a proposal by San Jose-based developer Republic Urban Properties to rezone a commercial site for residential, citing the need to retain and expand the city’s employment base.

“I wasn’t surprised by the vote because I think the city, particularly the mayor and the council, wanted to send a strong message to reinforce the jobs-first policy,” Republic Urban President and Managing Partner Michael Van Every said. “At least developers like us know where we stand.”

Michael Van Every
Michael Van Every

The no-conversion stance could place San Jose in danger of losing out on future residential projects amid an ongoing regional housing crisis exacerbated by skyrocketing home prices and apartment rents. Several other developers have already withdrawn proposals to rezone about 40 acres of land from commercial to residential in San Jose.

But city leaders argue that San Jose for its long-term fiscal health must solve a jobs imbalance relative to the housing base. They also point out that San Jose is still making room for housing in areas such as downtown, where high-rise residential towers are helping transform the business district into a vibrant, walkable urban neighborhood.

Still, the city’s policy against conversions could discourage residential development at a time when it is most needed. “Definitely, that’s going to happen,” Van Every said. “There’s opportunity to build [additional] housing in San Jose. The question is: Are we going to limit that supply even though the General Plan is intended to keep that supply moving?”

Like many Bay Area jurisdictions, San Jose has been struggling to address housing needs over the years, particularly affordable units. According to a report by the planning agency Association of Bay Area Governments, San Jose’s share of the housing responsibility in the region was determined to be 34,721 units for the period from 2007 to 2014. The city met 46 percent of that goal, issuing 16,029 housing permits during that time—compared to 65 percent for Santa Clara County and 50 percent for the Bay Area, overall.

San Jose was at 23 percent for very low-income, 20 percent for low-income, 2 percent for moderate and 85 percent for above-moderate units, according to ABAG’s Regional Housing Need Allocation Performance Report.

Rising costs for home buyers and renters alike only make the housing landscape even tougher to navigate. The median price for a single-family home in the San Jose metropolitan area reached $900,000 during the first few months of 2015, up 11.4 percent year-over-year, according to a quarterly report by the trade group National Association of Realtors.

According to an apartment market report by commercial real estate services firm Marcus & Millichap, effective rents in the San Jose area are expected to climb 8.5 percent to $2,486 a month by year-end 2015.

San Jose’s General Plan does take into account housing, projecting 120,000 new units and more than 400,000 additional residents through 2040. But Van Every’s concern is “where can we develop housing and how” given the city’s position on land conversions, he said.

The council-rejected Republic Urban proposal called for rezoning a 4.6-acre Midtown commercial property—the site of Mel Cotton’s Sporting Goods and the O.C. McDonald contracting company—for housing.

Leading up to the council’s decision, other developers had dropped their rezoning request, including Arizona-based The Wolff Co.’s proposal for 7 acres at 2829 Monterey Road and a San Francisco-based City Ventures project for 10 acres at 641 N. Capitol Ave.

Residential developers contend that smart housing growth can enhance the city’s tax base and lead to a population increase, spurring business. As it is, high housing costs is the top challenge to doing business in the San Jose area, according to an annual CEO survey by the public-policy organization Silicon Valley Leadership Group.

“Of course, the Bay Area needs a lot more housing, and being an economic center of the region, everyone wants to be in Silicon Valley,” said Leah Toeniskoetter, San Jose director for the Bay Area-based nonprofit civic planning organization SPUR. “Every city has a responsibility to address housing.”

But San Jose has good reasons to hold off on residential conversions and hold on to commercial and industrial land, she said. “We have housing but not enough jobs. Let’s figure out where housing development will not be fiscally negative” such as areas in which police, fire and other public programs already exist.

A city staff report for a council study session in April found that only 15 percent of San Jose land is for employment purposes while 57 percent is residential. Other Silicon Valley cities use up to nearly 30 percent of their land for employment.

The report also noted that there are only 87 jobs for every 100 employed residents in San Jose, compared to Sunnyvale’s 122 and Palo Alto’s 289 employment positions.

Whereas residential development creates the need for expensive public services for new households, San Jose officials say, job-producing land generates sales tax and other corporate-related revenue for the city.

“San Jose’s jobs/housing imbalance indisputably has caused the city to provide services at less than satisfactory levels for many years,” the city’s Mayor Sam Liccardo and other council members said in a memo in advance of the study session. “The preservation of employment lands must continue to be a priority if we intend to be serious about the restoration of city services.”

At the same time, the memo said, “San Jose continues to be one of the largest generators of housing in the Bay Area.”

For instance, the memo said, San Jose had 2,700 permitted units a year on average from 2010 to 2013—just under San Francisco’s pace of 2,800.

San Jose has also encouraged residential towers in downtown, where zoning is less stringent. Among the latest high-rise projects in the city center is the 643-unit Silvery Towers, being built by San Francisco-based Full Power Properties LLC in partnership with Cupertino’s KT Urban.

But even in downtown, Toeniskoetter believes San Jose should reserve space for offices. Right now, downtown sorely lacks Class A commercial buildings, she said, but demand for high-quality offices will only increase because of the strong interest in urban living, especially from young professionals, among other factors.

“In a hot residential market, the city has incentivized high-rise development, which is fantastic,” she said. “But the second part of the equation is that empty parcels will be key for jobs.”

Although Van Every is not thrilled with the city’s focus on commercial development at the expense of housing, he said he hopes he’s proven wrong because “they’re betting a lot of San Jose’s future on this ideology.”

Photography by Laura Kudritzki

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