SAN JOSE, CA as One of the Top 10 Growth Markets
Nestled just south of the booming San Francisco market sits San Jose, the largest city in a market with serious tech cred, including nearby headquarters offices of Apple and Google. The market is one of the top commercial real estate growth sectors in the country, with major job growth from technology companies fueling office development, residential development and the local economy.
We have a white-hot economy in San Jose, Stanford Jones, EVP of investments at Marcus & Millichap, relates. “It is a very dynamic tech market with explosive job growth and office development, office absorption, and that is what is driving growth in the San Jose market. It is very vibrant.” CBRE director of research and analysis Colin Yasukochi echoes Jones’ comments on the tech industry’s role, saying, “Almost all of the growth is being driven by the tech industry. This has resulted in a lot of office construction and a lot of residential construction as well.”
The market is made up of San Jose proper and San Jose MSA, which encompasses everything north, including Sunnyvale, Mountain View, the home of Google, and Cupertino, the home of Apple. Yasukochi refers to this as the “greater Palo Alto area,” and says that you can see the wave of growth moving out from there, starting in Palo Alto, Mountain View, Sunnyvale, Cupertino, and moving south through Santa Clara and north San Jose. “It really works in that order in terms of the wave of growth, says Yasukochi. “These markets are near Stanford University and venture capital, and traditionally they have been home to some of the largest and fast growing tech firms, and that is why these geographies are growing quite rapidly.” At the end of 2014, the Palo Alto office market had a vacancy rate of 4.8% and an incredible rental rate of $6.16 per square foot.
Although the presence of Apple and Google is nothing new, it’s the sustained growth of these companies that’s fueling this demand and attracting other tech companies to settle nearby. “While Apple and Google have been here for a long time, they have continued to expand at a very rapid pace,” Jones explains. “It is an overlay to the market, and it is common for them to announce every quarter that they are absorbing another 1.5 million square feet of office space. Apple is also in the process of building the Apple 2 Campus, which is an extremely monumental event for the South Bay.”
The growth of high-paying jobs from this industry is also driving multifamily development. According to Jones, there are 70,000 apartment units poised to come on line in the Bay Area over the next four years, and 30,000 of those units are in San Jose MSA. “That is very significant from a historical perspective,” he says, noting that there is also a lot of rehab-to-core work and value-add construction. The average rate for a two-bedroom apartment in the area currently ranges from $3,500 to $4,500, and the prices haven’t slowed absorption. “Rents are up between 45% and 50% from the downturn in 2008 and 2009,” says Jones, adding that there are also exceptionally high barriers to entry for investors looking to break into this market. “There are still relatively few opportunities in the core markets, and they are commanding very low yields—in the low fours. In the new construction stuff, those yields drop down into the low threes. But, it is a multi-buyer bidding process.”
Jones expects the multifamily market to continue to thrive at this pace for the next two years. “Right now the job formation has been outpacing the housing formation, and we expect that to continue through 2015 and into 2016,” he says. “It will likely become more of an equilibrium through 2017.” For the office sector, Yasukochi agrees that this upward momentum will continue through the year, but may begin to slow. “We don’t have a specific forecast, but we certainly expect this to be another year of strong growth, but it may not be as robust as 2014,” says Yasukochi. “Just like any expansion cycle, the growth rates start to moderate. The growth really started in 2010 and accelerated in 2011, and has been fairly strong since that time.”—Kelsi Borland
Top 10 Growth Markets