Report Google’s The decision to halt the Downtown West project in downtown San Jose sent shockwaves across the city and the rest of Silicon Valley. However, it is a striking illustration of the market distress that will prevail throughout 2023.
The Downtown West development near Diridon Station includes 4,000 homes, 7.3 million square feet of offices, 500,000 square feet of shops and restaurants, a community center and 15-acre park.Its economic impact is estimated at $19 billion.
“Like all major cities, downtown San Jose continues to struggle to get employees back into the office,” said Craig Petersen, an office and R&D specialist at brokerage Kidder Mathews. “Remote work is here to stay for longer than most of us realize.”
The persistence of remote work has halted the development pipeline — something that started before Google’s pause, but the search giant’s decision “doesn’t help,” Peterson explained. Completion of the San Jose BART expansion has also been delayed until 2034, and Google really wants BART to serve its project, he added.
“When the pandemic hit, all new developments were put on hold, and because of the extremely high office vacancy rates, they didn’t start — not just Google projects,” Peterson said. “It would be crazy to start a project with a lot of office vacancies.”
developer boston property has halted two office projects in Santa Clara and said they may not move forward until tenants are signed. Together, the two projects will bring nearly 2 million square feet of office space to Santa Clara.
“We’re assessing market conditions every month, and when we’ve established demand (and) supply (where) and rents are clearer, we’ll decide whether to go ahead or wait for pre-leasing,” said Aaron Fenton of Boston Properties’ Santa Clara Crossing and Platform 16 means.
Based in New York related companies, an entity owned by Miami Dolphins owner Stephen Ross, was supposed to break ground on its sprawling Related Santa Clara project in 2020, but it hasn’t started yet. Related said it expects to break ground this year, but no specific date has been announced.
Related Santa Clara is a 9 million square foot project with nearly 6 million square feet of office space across the street from Levi Stadium, home of the 49ers.
In San Jose, Google plans to continue the 10- to 30-year Downtown West project. However, the company has not yet confirmed when development will restart.
“We are working hard to ensure our real estate investments align with the future needs of our mix workforce, our business and our community. While we are evaluating how best to advance downtown West, we remain committed to San Jose for the long term and believe in the importance of development sex,” a Google spokesperson told real deal.
As recent statistics show, Google’s reassessment of its office needs reflects a larger shift in the market. Silicon Valley office availability — which includes vacant offices and those available for sublet — rose to 19.5 percent in the first quarter, compared with 16 percent at the end of last year and 17.7 percent in the first quarter of 2022, according to Kidder Mathews collect.
“Many tenants have lowered their office requirements, making renewal activity the main driver of market activity,” the report said.
Asking prices fell to $4.60 in the most recent quarter, compared with $4.94 in the final quarter of 2022, a 6.9% drop. Landlords are starting to lower interest rates in response to rising vacancy and availability rates, Kidder said.
A stark example of the troubled Silicon Valley office market is falling sales. Sales fell more than 50% year over year, from 460,000 square feet to 228,000 square feet. The sequential decline was even steeper, with nearly 700,000 square feet of office space sold in Q4 2022.
Another pressure point for the market comes from the failure of local banks, starting with Silicon Valley Bank early March. SVB holds $2.6 billion in commercial loans, 21% of which is in office properties. SVB was acquired by North Carolina-based First Citizens Bank two weeks after it went into receivership.
In its annual report, SVB said its business support loans “may involve a higher risk of default than our other types of loans” given economic uncertainty and the residual impact of the pandemic on retail, hospitality and offices.
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Google is expected to retain the Downtown West project and move forward as the market changes.but the consequences Difficulties may last for some time, and investors should be patient.
“It may take years for the economy to return to health, but those who remain patient with the office market could be rewarded handsomely,” the Kidd report said.
