The San Jose industrial real estate market had a decent quarter, with rising rents and sales prices reflecting stable consumer demand.
With positive absorption and record-low vacancy rates, San Jose broke ground on several new projects planned for delivery in 2023 and beyond. San Jose is expected to continue its growth to reach pre-pandemic levels of activity.
General Area Overview & Demographics
The largest city in Northern California, San Jose has a population of 1.03 million as of 2023.
The median age is 37, and the median household income is $117,324. Together with Oakland and San Francisco, San Jose forms the largest part of the metropolitan Bay Area.
Like most other cities in the Bay Area, San Jose features a sunny, Mediterranean climate with temperate summers and mild winters. Temperatures hover between 50 and 70 degrees F during the majority of the year, and rain is relatively infrequent.
As the center of Silicon Valley, San Jose is one of the most affluent counties in the country and has the highest concentrations of millionaires and billionaires in the nation. San Jose is home to several notable tech companies, such as PayPal, Adobe, Netflix, Cisco, and eBay.
Summary of San Jose Industrial Real Estate Performance in Q4 2022
The San Jose industrial real estate market had a decent quarter overall, with about 800,000 square feet of positive absorption in Q4 2022. Both industrial and flex space had shown positive absorption, bringing total annual positive absorption to just over 3 million square feet.
Vacancies also remained steady at a low rate of just 3.0%. San Jose’s relatively constrained supply generates substantial tenant competition, keeping vacancies low and landlords in a good position to bargain for rental increases. Total available space decreased by 2.5 million square feet between Q4 2021 and Q4 2022.
What Are Industrial Rents Like in San Jose?
Industrial rents in San Jose to an overall average of $1.78 per square foot in Q4 2022, with a flex average rental rate of $2.61 per foot and an industrial average rental rate of $1.40 per foot. Industrial rents have seen a 12.1% annual increase, while flex rents have shown a 3.8% YOY increase.
The large increase in industrial rents is due to relatively low supply and consistent post-pandemic demand. Subleasing rates, on the other hand, stayed steady at $1.46 per square foot.
The submarkets with the highest average industrial asking rates were Sunnyvale, Morgan Hill, Palo Alto, and Fremont at $2.45, $2.18, $1.59, and $1.58 per square foot, respectively. Submarkets with the highest flex asking rates were Palo Alto, Mountain View, and Sunnyvale at $6.75, $4.64, and $3.49 per square foot, respectively.
Purchase & Leasing Activity
Leasing activity remained fairly stable from Q3 2022 to Q4 2022. Subdued leasing activity is a result of constrained supply and existing properties having problems that make them difficult to lease. Slow leasing is also due to a hesitance to make capital improvements, so a large portion of transactions this quarter was from lease renewals.
However, touring activity for industrial space has been increasing through 2022. As industrial boundaries between Silicon Valley and the East Bay become blurred, prospective tenants are looking for space. Requirements for Silicon Valley and the East Bay reached a high in 2022 at 28.9 million square feet.
Total sales volume closed out the year at a little bit over $2 billion, with an average sales price of $348 per square foot as of Q4 2022. However, sales prices for prime space on Fremont and Santa Clara can reach over $1,000 per square foot.
New Industrial Real Estate Development in San Jose in Q4 2022
San Jose finished Q4 2022 with an annual total inventory addition of 1 million square feet. There is currently 3.7 million square feet of construction in the pipeline, with a significant portion of that construction in flex space.
The submarkets with the highest amount of industrial space under construction were Santa Clara and Sunnyvale at 1.7 million and 847,000 square feet, respectively.
Market Forecast for San Jose’s Industrial Real Estate Market in 2023
San Jose’s market is expected to suffer from supply constraints until new deliveries hit the market in 2023 and beyond. In the meantime, leasing activity might slow as landlords have difficulties making improvements to existing space.
The relative lack of space means rental rates could diverge between high-rent high-quality Class A space and lower-rent Class B and lower properties. Landlords that own high-quality space will drive future rental increases.
San Jose has several construction projects in the pipeline, though it may take some time before new deliveries start to affect market fundamentals.
Takeaways for Industrial Real Estate Investors
San Jose industrial real estate investors are in an advantageous position as the lack of space puts upward pressure on rents and gives landlords substantial bargaining power to negotiate leases. However, leasing may remain difficult as many existing properties have dysfunctions.
The most valuable properties will be high-quality amenities in the most active submarkets, such as Santa Clara, Fremont, and Mountain View. Landlords should also be wary of potential construction delays due to rising interest rates and permitting difficulties.
As always, stay vigilant, do your research, and happy investing.