Downtown office market is poised to escape doom loop
Signs of hope emerge, yet rebound is a year or 2 away, experts predict
Some signs of hope have sprouted for the feeble office markets in downtown San Jose and Silicon Valley, but a rebound remains a year or two away, local real estate executives said Sept. 6.
The prediction was among the assessments offered by a panel of industry leaders during a Silicon Valley Breakfast event Sept. 6 organized by law firm Hoge Fenton and moderated by Sean Cottle, one of the company's attorneys and shareholders.
The panelists were executives from Jay Paul Co., a veteran real estate firm; Urban Community, a local real estate firm that has teamed up with megadeveloper Westbank; Bay View Development Group; and Urban Catalyst, a local real estate firm that is active in downtown San Jose.
“Things are starting to improve in downtown San Jose,” Matt Lituchy, Jay Paul Co.'s chief investment officer, said during the event. “It's cleaner. There is less homelessness. It's better here.”
Yet plenty of challenges loom over both downtown San Jose and Silicon Valley in general, the panelists said.
Among the worst problems facing commercial real estate: Soaring interest rates and sky-high inflation have coalesced to brutalize the capital markets, making financing for the construction of new office buildings and apartment complexes difficult.
“It's a tough capital market, especially for what we do, which is the development of large-scale office projects,” Lituchy said. “The capital markets are frozen.”
The panelists believe that a turnaround in the market for the development of commercial projects such as office buildings and apartment buildings could materialize by the end of 2025.
This means that significant construction of new projects could resume in downtown San Jose as soon as 2024.
“Rents are going up for multifamily apartments,” said Erik Hayden, a founder and managing partner with Urban Catalyst. “We should see a lot of construction starts by late next year” in downtown San Jose.
Other experts on the panel believe that 2025 might be a more realistic year to see a relaunch of construction for downtown San Jose.
With that in mind, some of the real estate executives urged city and business leaders to press ahead with other crucial initiatives in the meantime.
Gary Dillabough, co-founder and chief executive officer with Urban Community, wants to see downtown San Jose become a vibrant entertainment district that can become a magnet for visitors
from outside of the area as well as people living in the city's core.
“We need to make 2024 the year of the entertainment district” in downtown San Jose, Dillabough said.
Numerous entertainment venues are already active in downtown San Jose. And the downtown has vibrant areas like San Pedro Square and SOFA, an arts and culture district, that draw visitors.
“We have some groovy things going on in the downtown right now,” said Ted Mcmahon, chief investment officer with Bayview Development.
But Dillabough believes San Jose now needs effective and consistent city leadership to help usher in the reality of a new, cohesive entertainment district.
While downtown San Jose must confront plenty of challenges, including crime, homelessness and a seemingly unending
problem of blight, some of the executives on the panel believe the Bay Area's largest city has a chance to march on its rival to the north, San Francisco, which has struggled in the wake of the pandemic with major store closures, drug use and other issues.
“There is a once-in-a-generation opportunity for San Jose to eat San Francisco's lunch,” Mcmahon said.
The South Bay city's success — or failure — in winning some crucial advantages from San Francisco will require cohesive and effective efforts on the part of business executives, political leaders and municipal bureaucrats, some of the panelists believe.
“San Jose is a more friendly place for conventions, it is a better place to hear music, it is a better place to have dinner,” Mcmahon said.
While the financial markets might be the greatest factor in the revival of the office markets, some signs of recovery — while only modest green shoots at present — have begun to appear in the forbidding landscape of the commercial property sector.
“There are some signs of increased demand for office space” in the Bay Area, Lituchy said during the presentation.
“Some A.I. (artificial intelligence company) requirements are looking in San Francisco,” Lituchy added in an interview with this news organization after the panel discussion and presentation. And “we are seeing more inquiries and tours in the South Bay” for office space.
Jay Paul Co. could be in a prime position if big tech companies or other large tenants decide they actually do want more large chunks of office space.
That's because the Jay Paul firm has completed construction and is offering for lease an iconic office tower at 200 Park Avenue in downtown San Jose.
The company enjoyed similar success a decade ago after the end of the 2008-09 recession. Jay Paul built multiple office complexes in northern Sunnyvale. As soon as an upturn began, the company landed tech titans as tenants, including Google and Amazon.
“Once the demand comes back, the high-quality office buildings will lease up very quickly,” Lituchy said.
Lituchy believes the 200 Park office tower could fit that bill.
San Jose, including the downtown, can wield plenty of major advantages over San Francisco and many other cities, in Dillabough's view. He pointed to the weather, the city's large population, top-notch universities such as San Jose State University, and world-class companies like Google, Adobe, Apple and Facebook-owner Meta Platforms.
“We have to be bold. We need to start thinking differently in San Jose,” Dillabough said. “We need a different attitude. We can't overthink things. We need to take chances.”