San Jose Commercial Real Estate – 2018 Outlook is Good, Says Colliers

Dave Schmidt of Colliers. Photo credit: Gary Mash, Marsh Marketing

Silicon Valley’s commercial real estate markets clocked another good year in 2017, and there appears to be more gas left in the tank.

That’s the word from Dave Schmidt, executive vice president with Colliers International, at the brokerage’s Trends event held Feb. 13. It was the 19th go-round for the event, which drew hundreds to Downtown San Jose’s California Theater for a little real estate, and plenty of politics and economic prognostication.

Christopher Thornberg, a founding partner with Beacon Economics, provided a lively run-down of “the good, the bad and the ugly” for the region’s economy. (Short version: He thinks 2018 will be another growth year with a low chance of recession in the next 24 months, but is troubled by labor shortages and political instability). Greg Valliere, chief global strategist of Horizon Investments, provided the view from Washington. And Marc Maiona, CEO of LeaseCalcs LLC, updated the audience on coming regulatory changes that affect how companies report leases on their balance sheets. The smorgasbord of content is part of how Colliers seeks to broaden the discussion from pure CRE to dot-connecting topics that will influence growth drivers down the road.

But real estate stats? We got that. Valley-wide, tenants leased 7.2 million square feet of all product types (office, R&D and industrial) in the fourth quarter of 2017, Colliers’ detailed stat book states. Net absorption was 1.3 million square feet, meaning tenants took up that much more space than they gave up. And demand is strong: Colliers says it’s tracking a 24.7 percent bump in demand for commercial real estate quarter over quarter. So it’s probably a good thing that developers are putting up about 4.1 million square feet of commercial space across the Valley.

San Jose continues to be one of the best value plays in the region, with average starting rates for office ($3.60 per square foot per month) about a dollar less than the Valley average and a stunning $4.20 lower than Palo Alto.  San Jose’s office vacancy ticked up in the fourth quarter to about 12.6 percent, but that’s partly thanks to new construction being completed that likely won’t stay vacant for long.

R&D space, though, is the larger market in Silicon Valley. There, San Jose’s vacancy rate declined from 12% in Q3 to 10.7% in Q4.

Industrial space – a massive market that’s critical to our economy if less sexy than high-tech office – remained tight. Vacancy in the fourth quarter stood at 3.8 percent, relatively unchanged over the last year. A 155,000 square foot manufacturing/warehouse project that just started construction at 448 Piercy in South San Jose will provide some relief. And developers are looking around for more industrial development opportunities throughout the city.

You can get your hands dirty with the entire stat book over at the Colliers Trends 2018 website.