Investors who are interested in San Jose office space will find unique opportunities and drawbacks. The city is the heart of Silicon Valley, with its suburbs home to household names such as Apple, Microsoft, Symantec, Samsung, Intuit, and Google.
However, there is a trend toward businesses leaving the area for lower taxes. Security giant McAfee recently announced its plans to move its headquarters to Frisco, Texas.
In addition, some investors became understandably nervous when news of mass layoffs in the area surfaced.
However, the San Jose area has seen fewer layoffs than its neighbor San Francisco and even added 51,000 jobs year-over-year. The area also maintained a lower unemployment percentage, with a 2.2% rate compared to the nation’s 3.7%.
Newcomers to Silicon Valley will find the area’s demographics encouraging.
- 1 General Area Overview & Demographics
- 2 Summary of San Jose Office Space Performance in Q4 2022
- 3 New Office Space Development Activity in San Jose in Q4 2022
- 4 Market Forecast for San Jose’s Office Space Market
- 5 Takeaways for Office Space Investors
General Area Overview & Demographics
San Jose is about 50 miles south of San Francisco. Although its population has decreased to just under 1 million, there are many college graduates (over 45%). The median household income is just over $125,000.
Weather conditions in Silicon Valley are some of the most pleasant on the West Coast, with around 300 days of annual sunshine and average temperatures around 70F.
Newcomers to San Jose should be prepared for an extremely high cost of living, which is around 48% higher than the national average. Housing costs are currently over 80% more than the national average.
Summary of San Jose Office Space Performance in Q4 2022
Landlords, property owners, and investors reacted to mass layoffs from tech companies by taking a “wait and see” approach. However, Silicon Valley has managed to be more resilient than other national markets, and staff head counts are still higher than early 2020 numbers.
Vacancies within the San Jose/Silicon Valley office space rose slightly, from 18.6% in the third quarter of 2022 to 19.0% during Q4.
The remote work policies that were introduced in early 2020 have remained in place for many companies. This is currently contributing to the development of amenity-rich Class A office space.
These offices are targeted toward businesses determined to provide remote staff with attractive reasons to return to an office environment.
What Are Office Space Rents Like in San Jose?
For reasons mentioned in the previous sections, direct asking rents within Silicon Valley have remained fairly static during 2022.
- During Q4 2022, average Class A rates rose to $5.73 per square foot (PSF). This was a minuscule .02% increase from Q3 2022 and a 0.4% increase year-over-year.
- The suburb commanding the highest rents: is Menlo Park, with an overall asking rate for Class A office space at $10.39 PSF.
- Bargain hunters may find some of the lowest office space rents in the suburbs of Fremont, Milpitas, and South San Jose. Asking rents for Class A properties during Q4 2022 were $2.40 to $2.66 PSF. However, sublets are difficult to find in these areas.
- The price of Silicon Valley’s sublease asking rents sank slightly to $4.62 PSF.
Next, we’ll check out news making purchases and leasing for the last quarter of 2022.
Purchase & Leasing Activity Within Silicon Valley
Renewals of existing leases far outpaced new ones, and subleases retained their popularity for smaller companies and their smaller space requirements.
One of the largest sublease deals during Q4: Tech security company Lacework’s 40,000 SF sublease from WeWork in Mountain View.
While investment deals are at their lowest in 10 years, brokers are seeing some momentum building, as reflected in these two sales:
- A cash buyer purchased an office complex at 684/686 W Maude and 480 North Pastoria Avenue in Sunnyvale for over $220 million. The complex’s total square footage is around 194,000 SF.
- Drawbridge Realty purchased 200 Mathilda Avenue South in Sunnyvale, a building with 157,000 SF, from JP Morgan Asset Management for $180 million.
Both properties were fully leased at the time of sale.
Notable Office Space Deals in San Jose in Q4 2022
All but one of the biggest lease transactions during this period were renewals, with a new lease finalized by Valley Health Center.
- The largest renewal transaction was finalized by accounting firm Frank Rimerman and Co. for almost 35,000 SF of space in downtown San Jose.
- Next in line: Valley Health’s new lease for 24.5 SF at 4151 Middlefield Road in Palo Alto.
- Accounting/technology/consulting firm Armanino LLP renewed almost 20,000 SF within 50 San Fernando Street.
The law firm McManis Faulkner also renewed over 19,000 SF of office space at 50 San Fernando Street.
New Office Space Development Activity in San Jose in Q4 2022
The region is seeing more “build to suit” office developments, which currently add up to around 4.8 MSF.
A large part of this space: 1.8 MSF – broke ground during Q4 in Mountain View and Sunnyvale for a single technology tenant.
In addition, around 2.9 MSF of speculative office projects are currently under construction.
Now that we’ve researched and presented data for the area, what can investors expect in 2023?
Market Forecast for San Jose’s Office Space Market
While continuing tech layoffs are causing uncertainty about how much future office inventory will be required, many companies will be searching for Class A properties to lure remote workers back to the office.
Savvy investors will want to follow the trend from remote to office work in Silicon Valley during 2023 as part of their research.
Another positive fact: the current economic slowdown appears to have a diminished effect within Silicon Valley due to its role as home to legendary names in tech business.
It also provides office space to critical industries like hardware, semiconductor, and IT infrastructure.
Takeaways for Office Space Investors
While San Jose office space sales volume has been lower than pre-pandemic numbers, the news wasn’t all bad. Sales of 64 total investment sales were recently recorded in the Silicon Valley area. Still, this number is much lower than the 137 sales finalized in 2019.
Despite layoffs, over 600,000 SF of new development has been approved for the downtown San Jose market.
Perhaps most encouraging is the news that Google and Meta have received approvals for a combined 2.5 million SF of new office projects.