Apartment Vacancy Rising in San Jose

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After years of demand outstripping supply, the apartment vacancy rates in San Jose are starting to inch upwards as the COVID pandemic continues to put pressure on housing markets in the tech-rich havens around San Francisco.

While San Jose has steadily been adding units for the last several years, much of the focus has been on housing to support staffing increases at the big tech firms that provided a steady supply of tenants for expensive new apartments. As many of the big tech firms have paused hiring or have embraced telecommuting to broaden work-from-home staff outside of Silicon Valley, the demand for high-priced luxury accommodations have stalled in the wake of the COVID pandemic. According to CoStar, apartment vacancy rates have risen from 6% to 10% year-over-year.

There have been a number of factors contributing to the increase in vacancy rates. While sound fundamentals buoyed the housing industry for a number of months in 2020, the economic slowdown that has hit much of the US is chipping away at demand in the Bay area.

For instance, massive out-migration from the Bay area had been previously offset by hiring frenzies at the major Silicon Valley employers. Now that that hiring is slowed due to the pandemic, there is little inflow of new residents to offset those leaving for Austin, Phoenix, or Denver

The great “telecommuting experiment”, accelerated by the need for social distancing and quarantines to protect employees and clients, has also played a role in the decline in demand for high-priced housing. Workers who no longer need to slog to the office every day have been able to meet their housing needs in lower-priced markets they would not have previously considered. New properties that previously enjoyed premium rents are now struggling to attract tenants who can work remotely from anywhere in the US.

Landlords, who benefit most when units are occupied, have quickly responded to shifting demand. Rent rates have dropped by a significant degree in 2020, with some submarkets declining as much as 15% since the pandemic shutdowns began in March of 2020. San Jose, in particular, has underperformed significantly when compared with the national average. The largest rent losses have been felt in both San Jose and San Francisco.

In order to attract tenants, landlords have not only been lowering monthly rents, Many have resorted to giving concessions, such as free introductory rents, in order to entice renters to both new and existing complexes. This is new territory for new properties, that previously enjoyed high demand without the need to provide concessions.

In response to the weakening rents and rising vacancy, developers have been loathe to take on new projects in the latter part of 2020, which will impact future supply. However, with over 5,500 new units already in the pipeline at various stages of construction, vacancy rates could continue to put pressure on the housing market for the next few years.

Keystone Commercial Brokerage serves the needs of commercial real estate investors in the Santa Clara and San Mateo counties, specializing in land, multi-family, office, and industrial property. Paul Phangureh has over 18 years of experience in buying and selling in the Santa Clara and San Mateo County areas. Contact Paul at 650-924-2544, or email at [email protected]