San Jose Office Investment Forecast
San Jose Metro Area, 2018 Outlook
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Historic Development Weighs on Silicon Valley; Investors Undertake More Conservative Endeavors

Hectic 2017 gives way to slower pipeline; transition year to follow as supply pressures are alleviated. Following the incredible delivery slate of 2017, the sharp slowdown in development in 2018 will offer the market a chance to stabilize. The pipeline reached 8.4 mil-lion square feet last year, led by the completion of headquarters for Apple and Palo Alto Networks, along with additional space for Nvidia and Facebook. As a result, the metro vacancy rate rose considerably as corporations moved to new spaces, leaving underutilized existing product on the market. The sharp surge in vacancy corresponded with a decline in the average effective rent as heated competition among property managers sparked higher concessions. In 2018, completions will fall by more than 60 percent, ushering in a transition year as older spaces are leased up and asking rents stabilize. As a result, asking rents will resume an upward climb, albeit at far more moderate rates than previous years in the current cycle.

Investor activity moderating as development surges. As construction picked up in 2017, transaction velocity slowed considerably as buyers took a more cautious stance toward allocations amid the greatest supply growth in nearly 20 years. Owner-users including Samsung, Facebook and Google remain active in acquiring space to make room for expansion. As a result, prices per square foot remain elevated, supporting cap rates in the low- to mid-5 percent band, particularly for product near major transportation routes and corporate campuses. Meanwhile, investors are focused on properties with long-term leas-es already in place, reducing lease-up risk as elevated development prompts a shuffling of tenants throughout the metro. More robust returns can be obtained through site improvements or taking risks associated with higher vacancy at locations farther away from public transportation and amenities.