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

San Francisco’s office market has always been the brightest star in the Bay Area. Led by powerful tech and startup companies, rents have historically been high, and leasing remained strong. But the city’s prestige was upended after the pandemic hit. The metro has faced serious challenges in occupancy and leasing as workers switched to remote work and moved to lower-cost areas. Concerns around safety and quality of life in the city added to those troubles, prompting some companies to look elsewhere for space or commit to permanent remote work. The major shift is drawing attention to nearby Silicon Valley hub San Jose, which has been experiencing significant growth in office leasing, development, and population.

San Jose has also been known for its tech campuses and R&D (research and development) facilities, but for those looking for nightlife, culture, and anything else that city life has to offer, it’s hard to beat the atmosphere of San Francisco. But San Francisco’s much-publicized struggles with crime, affordability, and homelessness have reportedly led to residents leaving in droves, resulting in the nation’s highest office vacancy rates. So with so many leaving San Francisco, will San Jose’s development boom be enough to draw more tenants?

Tech town

As the largest city in Silicon Valley, San Jose has a long history as a home to tech campuses. Companies like Netflix, Paypal, and Adobe all have major outposts in the town. But workers typically didn’t live in the decidedly more suburban area, with many commuting from San Francisco. Some tech firms tried making it even easier for their employees to get to campus, launching private shuttle buses to ferry them back and forth from San Francisco. 

In 2011, looking to create more jobs, the city of San Jose adopted an ambitious plan, Envision San Jose 2040. The plan sets a roadmap for ramping up development and adding more density, housing, mixed-use developments, and walkability. Every year, the plan gets revisited and tweaked based on what else needs addressing. Building more housing, including affordable housing, is now a big part of that plan. San Jose Mayor Sam Liccardo set a goal in 2017 to have 25,000 new housing units in the pipeline by 2023. But the city still has a ways to go to meet that goal because, as of last summer, the city had only completed 3,348 housing units.

Recent data from Colliers shows that San Jose’s office sector is performing much better than San Francisco’s. Office vacancy in San Jose, according to the brokerage firm, is in the range of 9 to 10 percent, as opposed to San Francisco, which has a vacancy rate of around 20 percent and is twice as high as buildings in Santa Clara County and the Peninsula. Further showing its strength, one recent report named San Jose as the top metro area where Millennials want to move. At one luxury condo development in downtown San Jose, there is currently a 4,000-person waitlist for units at the forthcoming tower.

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

Last month, Caltrain announced new details for its plan to build a 1.2 million-square-foot mixed-use development next to the Diridon train station, where Google’s 80-acre campus is rising. The plans include two Class A office towers and ground-floor retail. That project could break ground by early 2024. One of the country’s largest office landlords, Boston Properties, is even restarting a development it had paused after the onset of the pandemic in 2020. That project, a pair of 16-story, interconnected office towers with more than 2 million square feet of office and retail, was first proposed in 2018. “You don’t see, other than our San Jose project, us announcing major office developments at the moment,” said Douglas Linde, president of Boston Properties.

Future plans

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

“In some cases, neighborhoods are doing better than they were pre-pandemic,” he said. A bright spot for the city has been a major uptick in tourism lately, something Sammons called “palpable,” which has also helped boost retail performance around Union Square, an area that had been experiencing a lot of turnover. But are workers back in the CBD? Not really. “The numbers are ticking higher, but they’re nowhere near where they were,” Sammons said. Salesforce, the city’s largest private employer, has cut down its office footprint three times since the start of the pandemic.

Like many other cities, the office market in San Francisco is experiencing a flight to quality. Class A buildings with the most popular amenities are experiencing the highest occupancy rates by far. “Tenants are flooding into top-quality buildings,” said Sammons. Among “Tier 1” buildings in the city, which Cushman & Wakefield classifies as the best of the best, overall vacancy is 4.2 percent. Meanwhile, the overall average vacancy rate in the city is around 21 percent. Sammons said buildings within the city’s central business district are performing better in general, while buildings further from the city center that may have been popular pre-pandemic are struggling to lease up. “Tenants want safety, security, convenience—any buildings that check those boxes,” he said.

San Francisco has gotten plenty of criticism lately, and not just from political rivals taking aim at city leaders. Prologis CEO Hamid Moghadam, who leads the largest industrial real estate firm in the country, was robbed last month while returning to his home in an upscale area of San Francisco. In an interview after the incident, he called San Francisco “probably the most dysfunctional city in America.” Around the same time, tech executive Drew Oetting, president of the venture capital firm 8VC, which relocated to Austin, Texas from San Francisco, reportedly called San Francisco “the worst-run city in the United States,” during a conference. 

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

What really separates the two cities’ office markets are the physical and the not-so-physical: San Francisco is about software while San Jose and Silicon Valley are about hardware, said Sammons. The difference underscores why San Francisco’s office market has struggled more than San Jose’s. A massive amount of San Jose’s office market is dedicated to R&D space, where workers must be physically present to work on products—working from home isn’t an option. Meanwhile, 95 percent of commercial space in San Francisco is office space, much of which was occupied by startups and Silicon Valley companies that opened offices there over the last decade to appease workers who lived in the city and didn’t want to commute to Silicon Valley every day, according to Sammons. “Historically, the software market, that segment is the least desirous of coming back to the office,” he said. 

However, there have been major office deals in “the city” lately, most notably with Google Cloud’s 300,000-square-foot lease in SoMa, where the company will take over payment processing company Stripe’s former headquarters. Late last year, Chime took 200,000 square feet in the heart of the city at 101 California St. “I think it will be successful in that they’re expanding rapid transit there, and BART is coming into San Jose over the next couple years,” said Sammons of development in San Jose. “But they’re 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 challenged, does have bright spots—especially in the top tier segment of buildings. Tourism has come back, which is giving a much-needed boost to retail, and the city is taking steps to bring back pedestrians to once vibrant areas. If the city can address some of its issues, it could come back in a big way and restore its status as one of the most desired office markets in the country, but it may take some time. In the meantime, the plethora of new office and housing development in nearby San Jose and city officials’ ambitious plan to transform the city could be a model for other cities in the Bay area and around the country.

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