South Bay’s Multifamily Development Segment Rides a ‘Perfect Storm’

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By Robert Carlsen

As the commercial building boom accelerates within the South Bay’s Golden Triangle district, the burgeoning North San Jose tech district bounded by highways 101, 880 and 237, future workers will be able to take advantage of new residential options rising in the surrounding regions and linked by bus, light rail and, in the near future, BART.

[contextly_sidebar id=”8e7d076737ab121c25e6d1675c0ec3b8″]Tech giants such as Samsung and others are expanding their operations within the Golden Triangle while other major players, such as Adobe, Acer, Oracle and Pinger, continue to lure technology workers within the downtown San Jose core. These workers, according to Jerry Nickelsburg, senior economist with the UCLA Anderson Forecast, are predominately Millennials (18-33) who prefer to live close to work in more densely populated areas rife with restaurants and shops.

While the current shortage of housing in the region is illuminated by an occupancy rate that is approaching 97 percent in some areas, rental rates have skyrocketed in recent years, up more than 14 percent in the past year alone, according to MLS Listings statistics, which also lists the average rental rate for an apartment in Silicon Valley at $2,194 per month, with condominiums going for an average of $587,500.

Amber Schiada, research manager at JLL Research, said that average apartment rents in Santa Clara County have increased almost 37 percent since the low in 2009, which was around $600. She said that last year, approximately 33,000 people migrated to the region, but there were only 8,000 new residential building permits issued.

“The new supply of apartments that has been and will be added to North San Jose will provide much needed homes for the area’s high-technology workers and for supporting economic development,” said Jacky Morales-Ferrand, assistant director for the Housing Department at the city of San Jose. “Additionally, these developments are becoming more urban and mixed-use in nature, which are important for creating the type of vibrant built environments that technology firms and employees seek.”

Morales-Ferrand added that because these new developments are primarily high-end apartments, few residential opportunities exist in North San Jose that lower-income, support economy workers can afford. “Studies show that one high-wage worker directly and indirectly creates up to five low-wage workers employed in high-tech and retail/service sectors,” she said. “While the North San Jose plan includes a strategy for affordable housing, the physical production of such housing has not materialized, creating significant unmet demand for affordable homes.”

And with developers putting major residential projects on hold due to the Great Recession five to six years ago, the time has come to finally get these projects off the ground, said Paul Zeger, principal at Polaris Pacific, a real estate sales, marketing and research firm in San Francisco.

Zeger, who presented some regional macro trends at a recent Urban Land Institute market update event in San Francisco, said developers are now less fearful of overbuilding since the housing shortage is currently hitting record levels. He said Polaris Pacific forecasts a peak of 8,850 apartment units to be completed in Silicon Valley by 2015 and that there will still be a shortfall of 27,461 units (both condos and apartments).

Even with apartment rents so high, he added, it would be somewhat foolish for new tenants not to buy. Nonetheless, for builders, “Apartments are safe with a 6 percent to 8 percent return.” And San Jose and Santa Clara County, with available land, cooperative local government, job growth and a plethora of workers/tenants has the makings of a “perfect storm,” he said. In addition, he said the Triangle and San Jose are the ideal meeting place for Peninsula and East Bay workers.

Within the Golden Triangle, and part of a new City Center proposal by Related California located just north of the 49ers’ new Levi’s Stadium, a 530-unit residential tower is planned. Located just east of that is the Irvine Co.’s recently completed 1,750-unit Crescent Village apartment complex, which is nearly fully occupied. Irvine is also building the 202-unit Stewart Village apartment complex just southwest of the Triangle in Sunnyvale, with completion set for this summer. Mike Lyster, vice president of communications for the developer, said the project is being designed to appeal to tech workers at major nearby employers, such as Twitter, Apple, Amazon, Yahoo, Google and LinkedIn.

And in San Jose proper, 2,700 units are being built or in the process of starting construction, including KT Properties’ 643-unit St. James Towers (estimated completion in 2016), Intracorp’s 408-unit North San Pedro development (2016), Simeon Residential’s 347-unit Centerra (2015), Essex Property Trust’s 312-unit One South Market complex (2015) and Sares Regis Group’s 235-unit The Pierce (2015).

Employment in the region, the bellwether for commercial and residential development, had gained momentum last year, and all indications, especially on the housing side, are that 2014 will be just as healthy.