As San Francisco Office Market Struggles, San Jose’s Profile Rises

The San Francisco office market has always been the brightest star in the Bay Area. Led by powerful tech and start-up companies, rents have been consistently high and leasing has remained strong. But the city’s prestige has been upended after the pandemic. The metro faced serious occupancy and rental issues as workers shifted to remote work and moved to lower-cost areas. Concerns about safety and quality of life in the city have added to these issues, prompting some businesses to look elsewhere for space or engage in permanent remote work. The major shift draws attention to nearby Silicon Valley hub San Jose, which has seen significant growth in office leasing, development and population.

San Jose is also known for its tech campuses and R&D (research and development) facilities, but for those looking for nightlife, culture, and all that city living has to offer, it’s hard to beat the atmosphere. from San Francisco. But San Francisco’s high-profile struggles with crime, affordability and homelessness have reportedly led residents to leave in droves, leading to the highest office vacancy rates in the nation. So, with so many departures from San Francisco, will San Jose’s development boom be enough to attract more tenants?

Technology city

As the largest city in Silicon Valley, San Jose has a long history as a hotbed of tech campuses. Companies like Netflix, Paypal, and Adobe all have major outposts in the city. But the workers generally did not live in the decidedly more suburban area, with many commuting from San Francisco. Some tech companies have tried to make it even easier for their employees to get to campus, launching private shuttles to transport them to and from San Francisco.

In 2011, seeking to create more jobs, the City of San Jose passed an ambitious plan, Envision San Jose 2040. The plan sets out a roadmap to accelerate development and add more density, housing, development to mixed use and pedestrian potential. Each year, the plan is reviewed and modified according to other elements to be addressed. Building more housing, including affordable housing, is now an integral part of this plan. San Jose Mayor Sam Liccardo set a goal in 2017 to have 25,000 new homes planned by 2023. But the city still has some way to go to reach that goal because, since the summer last, the city had only finished 3,348 dwellings.

Recent data from Colliers shows that San Jose’s office sector is faring much better than San Francisco’s. The office vacancy rate in San Jose, according to the brokerage firm, is in the range of 9-10%, unlike San Francisco, which has a vacancy rate of around 20% and is twice as higher than buildings in Santa Clara County and the Peninsula. Again showing his strength, a recent report named San Jose as the number one metro area millennials want to move to. In a luxury condo development in downtown San Jose, there is currently a waiting list of 4,000 people for units in the next tower.

New developments in San Jose include Google’s 80-acre mixed-use project, which is set to open next year. Once built, the project will be the largest development in San Jose’s history. The campus will include 4,000 housing units, 1,000 of which will be designated affordable. Google said it expects up to 25,000 employees to work in the office. Facebook and Apple are also poised to expand their footprint in Silicon Valley.

Caltrain last month announced new details for its plan to build a 1.2 million square foot mixed-use development next to Diridon Station, where Google’s 80-acre campus is growing. Plans include two Class A office towers and ground floor retail. This project could start in early 2024. One of the nation’s largest office owners, Boston Properties, is even restarting a development it halted after the pandemic hit in 2020. This project, a pair of office towers 16-story interconnected offices with over 2 million square feet of office and retail space, was first proposed in 2018. right now,” says Douglas Lindepresident of Boston Properties.

Future plans

Robert Sammons, senior director of research at Cushman & Wakefield, lives in San Francisco and takes MUNI to the brokerage firm’s office in the Financial District. He said he has seen things change in the city, particularly in the struggling downtown business district, while other neighborhoods have rebounded more quickly from pandemic-related struggles as more and more more hybrid and remote workers are spending time in their neighborhoods and helping to boost local retail businesses. .

“In some cases, neighborhoods are doing better than they were before the pandemic,” he said. One bright spot for the city has been a major increase in tourism of late, something Sammons called “palpable”, which has also helped boost retail performance around Union Square, an area that had experienced a lot of turnover. But are workers back in the CBD? Not really. “The numbers are going up, but they’re nowhere near where they were,” Sammons said. Salesforce, the city’s largest private employer, has reduced its office footprint three times since the pandemic began.

Like many other cities, the office market in San Francisco is experiencing a flight to quality. Class A buildings with the most popular amenities experience by far the highest occupancy rates. “Tenants are flocking to higher quality buildings,” Sammons said. Among the city’s “Tier 1” buildings, which Cushman & Wakefield ranks as the best of the best, the overall vacancy rate is 4.2%. Meanwhile, the overall average vacancy rate in the city is around 21%. Sammons said buildings in the city’s central business district are doing better in general, while buildings further from downtown that might have been popular before the pandemic are struggling to be rented. “Tenants want safety, security, convenience — all buildings that tick those boxes,” he said.

See also

San Francisco has come under a lot of criticism lately, and not just from political rivals targeting the city’s leaders. Prologis CEO Hamid Moghadam, who runs the country’s largest industrial real estate company, was robbed last month on his way home to an upscale San Francisco neighborhood. In an interview after the incident, he called San Francisco “probably the most dysfunctional city in America”. Around the same time, CTO Drew Oetting, president of venture capital firm 8VC, who moved to Austin, Texas from San Francisco, would have called San Francisco “the worst managed city in the United States”, during a conference.

While the city is undoubtedly struggling with office occupancy and quality of life issues, authorities have also tried to revitalize the city and bring back pre-pandemic foot traffic to downtown areas. The Downtown San Francisco Partnership launched the Public Realm Action Plan, a collection of initiatives concocted by city planners. The plan details how the city can use public and private spaces within a 43-block radius, bring pedestrians back and restore character to the area that has disappeared since the pandemic.

What really separates the two cities’ office markets are the physical and less physical markets: San Francisco is about software while San Jose and Silicon Valley are about hardware, Sammons said. The difference underscores why the San Francisco office market suffered more than San Jose. Much of the San Jose office market is dedicated to R&D space, where workers must be physically present to work on products – working from home is not an option. Meanwhile, 95% of commercial space in San Francisco is office space, much of it occupied by startups and Silicon Valley companies that have opened offices there over the past decade to appease workers. who lived in the city and didn’t want to go to Silicon. Valley every day, according to Sammons. “Historically the software market, this segment is the least eager to return to the desktop,” he said.

However, there have been major office deals in “the city” recently, including Google Cloud’s 300,000 square foot lease to SoMa, where the company will take over the payment processor’s former headquarters. Stripe. Late last year, Chime took over 200,000 square feet in the heart of the city at 101 California St.” said Sammons of the development in San Jose. “But these are very different markets. San Jose is absolutely much more of a suburban market and San Francisco is San Francisco.

San Francisco’s office market, while certainly challenging, has some bright spots, particularly in the upper building segment. Tourism has returned, providing a much-needed boost to retail, and the city is taking steps to bring pedestrians back to once vibrant areas. If the city can fix some of its problems, it could come back strong and restore its status as one of the most desirable office markets in the country, but that may take some time. In the meantime, the plethora of new offices and housing in neighboring San Jose and the city authorities’ ambitious plan to transform the city could be a model for other cities in the Bay Area and the country.

Jose C. Birney