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Investors, Tenants Scramble For Space In Downtown San Jose As ‘Google Effect’ Takes Hold

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It has been over a year since Google said it would build a nearly 8M SF village that would dramatically transform San Jose’s downtown and transit hub at Diridon Station. Since then, offices have been trading at much higher prices than a few years ago and tech companies are increasingly leasing up offices.

Investors, Tenants Scramble For Space In Downtown San Jose As ‘Google Effect’ Takes Hold
Downtown San Jose

“There was a lot of velocity on the leasing side that was driving a good narrative for sales of office buildings,” Cushman & Wakefield Executive Managing Director Eric Fox said. “But the Google campus has added what feels like rocket fuel to activity.”

All asset classes have benefited from increased investor interest, he said. Multifamily developing has been strong in downtown, and office has experienced an uptick in investment and leasing activity. The impact of Google on San Jose’s office market will be discussed during Bisnow’s Silicon Valley State of the Market event July 26.

Momentum in San Jose has been building in recent years even though few buildings have traded hands during that time. Fox said the downtown market started to turn the corner after the Great Recession, with the opening of San Pedro Square Market and food court in 2010. Residential development kicked into higher gear and office tenants started looking at the downtown market due to accessibility from Caltrain, he said.

The few large office assets to trade hands prior to Google’s announced campus include 160 West Santa Clara and 303 Almaden. Once Google committed to downtown, these buildings sold a few months after the announcement for much higher than their original purchase prices.

Investors, Tenants Scramble For Space In Downtown San Jose As ‘Google Effect’ Takes Hold
Savills Studley Vice Chairman John Brady

AEW Capital Management bought the 157K SF 303 Almaden building for $80.2M ($509/SF) July 2017 in what was considered the highest price per square foot. The sellers, Four Corner Properties and Rockwood Capital, bought the building in 2013 for $40M.

Beacon Capital Partners bought the 15-story building at 160 West Santa Clara in April for $101.5M, 25% higher than the seller’s 2014 purchase price. BIT Holdings Severity Five paid $81M for the building in 2014.

Leasing activity has also picked up as more companies turn to San Jose as a more affordable option to rising prices in San Francisco and Silicon Valley.

Savills Studley Vice Chairman John Brady said downtown San Jose hasn’t been an attractive solution for tech companies outside of Adobe or Oracle until recently.

As tech companies like Google, Apple and Facebook have expanded and bought buildings in the Bay Area, some neighboring companies have found themselves displaced and have turned to cheaper markets.

The same things that have made Downtown San Jose attractive to tech companies have also made it attractive to smaller companies in need of new space: affordable office space, access to transit and employees.

In downtown San Jose, Class-A rents are $4.11/SF compared to Menlo Park's $10.87/SF and Mountain View/Los Altos' $6.18/SF, according to data from Savills Studley. During Q1, leasing activity was up 8.8% in Downtown San Jose.

Part Of A Long-Term Strategy

Investors, Tenants Scramble For Space In Downtown San Jose As ‘Google Effect’ Takes Hold

Tech companies are proving that they are in Bay Area markets for the long term and want to make sure they have the space they need when they want it. It is likely that Google chose San Jose because it is hard to achieve 8M SF of office north of San Jose, Brady said. 

“Having this kind of density in a downtown is very unusual,” he said.

The capacity of supply, where the talent is and where future employees might be also played into the decision, Brady said, adding that living close to work and transit becomes a tremendous benefit for a company’s employee base. Downtown’s resurgence with additional lodging units and residential units has helped revive the area and increase its allure. 

“It’s exciting to see the hope and expectation of Google making a move into Downtown San Jose,” Brady said. “It affirms the attractiveness of the downtown market.”

Another shifting trend is that tech companies are planning through future cycles and have expectations that they are going to need the space in the future, Brady said.

 “I didn’t think [we were] going to have a 10-year run we’re currently in right now,” Brady said. “If you look at Google, Apple, Facebook, Amazon, they’re behaving with a 20- to 30-year planning cycle that we haven’t seen before.”

He said these tech companies are looking into the long term similar to how Japanese companies function on 25- to 50-year horizons.

“One of San Jose’s challenges will see how they can keep their identity as a downtown and be attractive to other tenants,” Brady said.

Hear more about Google’s impact on Downtown San Jose during Bisnow’s Silicon Valley State of the Market event July 26 at DivcoWest’s Century Plaza in Foster City.