SAN JOSE — The decision by two tenants to exit downtown San Jose might worsen the maladies that already afflict the urban core’s economy in the wake of the coronavirus.
PwC, a professional services titan, and its recently purchased tech company, Surfaceink, are poised to leave downtown after PwC signed a lease for a big chunk of space in a new office building at Santana Row in west San Jose.
The prospect of tenant departures comes at a time when downtown San Jose already struggles with office vacancy levels that have soared to worrisome heights.
“This is going to raise the vacancy rate in downtown San Jose,” said David Taxin, partner with Meacham Oppenheimer, a commercial real estate firm. “With the amount of vacancy downtown, this won’t help the cause.”
At the end of 2023, downtown San Jose’s office availability rate was at an all-time high of 35.7%, according to a report from Savills, a commercial real estate firm. Office availability measures the combination of empty office space offered directly by building owners and space that tenants are offering through sublease.
As further evidence of a feeble real estate market in downtown San Jose, within the last four months, two large office properties were sold at a big loss compared with their prior sales.
In December 2023, an office tower at 303 Almaden Boulevard was bought for slightly under $23.8 million — which was 70% below the price paid for the highrise at the time of its prior sale in 2017 for $80.2 million.
In February 2024, a two-tower office complex at North Market Street and West St, John Street was bought for $34.2 million — a nosedive of 77% compared with the $141.4 million paid in 2019 for the highrises.
While the price declines are jaw-dropping, experts such as David Sandlin, an executive vice president with Colliers, a commercial real estate firm, point out that the newly established prices at least set a current value for office buildings for office buildings in downtown San Jose.
“We now know the price that a Class A building in San Jose will trade for,” Sandlin said in a prior interview with this news organization on the topic.
The price for the 303 Almaden tower worked out to $151 a square foot while the price for the 111 Market Square tower was $105 a square foot. Some experts note that the 303 Almaden highrise is deemed to be of greater quality than the two-tower office complex.
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Also of interest with these deals is that the buyers of each of the office properties are separate groups that both are headed up by George Mersho, chief executive officer of Morgan Hill-based retailer Shoe Palace.
PwC, as a result of its decision to move to Santana Row, a destination mixed-use neighborhood in San Jose, will also shift its new subsidiary, Surfaceink, into the same One Santana West office building near the corner of South Winchester Boulevard and Stevens Creek Boulevard.
“The great thing about the PwC deal is that they stayed in San Jose,” said Bob Staedler, principal executive with Silicon Valley Synergy, a land-use consultancy. “With the amenities at Santana Row, it’s understandable why PwC would go there.”
About 1,200 PwC employees will be located at the One Santana West office building. That move is slated to occur in 2026.
Still, downtown San Jose appears more than capable of being a vibrant host for office tenants and conventions.
The recent Nvidia artificial intelligence convention, in addition to compelling keynotes and packed events, was also the catalyst for lively crowds that poured into the downtown in search of meals, drinks, or entertainment.
“The activation of downtown San Jose and the energy downtown is what is going to appeal to companies with younger employees,” Staedler said. “Having a constant stream of events and activities such as jazz festivals, live performances and other exciting events is the way to attract companies to downtown San Jose.”
PwC is expected to vacate 80,000 square feet at an office tower in downtown San Jose, property experts say. Surfaceink leased 7,000 square feet on Stockton Avenue on the western edges of the downtown.
“You could get a new AI company or software company that wants to be in an urban environment in the PwC spaces,” Staedler said.
Political and city leaders will need to adjust their thinking regarding the downtown in order for the city’s urban core to truly rebound.
“Antiquated dreams of a Trader Joe’s or a Safeway in the heart of downtown are days gone by. They are over,” Staedler said. “Downtown needs to focus on vibrancy.”