Upscale Units Drive Rent Growth in San Jose

The metro’s affordability issues are likely to continue, since multifamily developers are focusing on high-end assets, which are more profitable than working-class units.
San Jose rent evolution, click to enlarge
San Jose rent evolution, click to enlarge

A top-heavy job market, strong technology sector and solid population growth are upholding San Jose as one of the most economically vibrant metros in the U.S. Although 2018 is expected to be a banner year for completions, policy changes may lead to ballooning construction costs for multifamily properties. Until then, it is growth in the Lifestyle segment that’s driving improvement in the local rental market.

At 2.7 percent as of November, San Jose’s unemployment rate is among the lowest it’s been in the current cycle. The metro’s education and health services sector led growth, with the addition of 9,100 jobs in 2017. Due to the metro’s position as the world’s most high-profile technology hub, major companies are continuing their expansion—Google, LinkedIn and Apple still have projects lined up. The office development pipeline is expected to remain robust, as 3.3 million square feet is scheduled for delivery this year.

The metro’s affordability issues are likely to continue, since developers are focusing on upscale assets, which are more profitable than working-class units. This trend is in fact predominant in most of the nation’s major metros. As of February, 8,000 units were underway in San Jose, mostly concentrated in core submarkets. We expect 3,800 units to be added this year. As a result, rent growth will likely reach 2.4 percent in 2018.

Read the full Yardi Matrix report.