Memorandum CAPITAL of SILICON VALLEY
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CED AGENDA: 6/26/17 ITEM: D (4) CITY OF SAN JOSE Memorandum CAPITAL OF SILICON VALLEY TO: COMMUNITY & ECONOMIC FROM: Blage Zelalich DEVELOPMENT COMMITTEE SUBJECT: DOWNTOWN PROGRESS DATE: June 19, 2017 REPORT Approved Date 1% RECOMMENDATION Accept this informational report highlighting Downtown progress from August 2016 - June 2017. OUTCOME The Committee will receive a progress report related to Downtown commercial and residential development, economic vitality initiatives, public life and place making, clean and safe activities, special events, and convention and cultural activities. BACKGROUND Vibrant and successful city centers include four key components - work environment, urban living, arts and entertainment, and shopping and dining - connected through the public realm. A vibrant city center is eclectic, interesting and inviting; has strong commercial and residential development; is socially, economically and ethnically diverse; is easily accessible from, a variety of transit; has a healthy mix of land uses; and attracts a variety of talent. Downtown San Jose is Silicon Valley’s city center, its only true urban environment. To this end, the City is committed to thoughtful but aggressive growth and planning efforts Downtown. A fulltime Downtown Manager, embedded within the Office of Economic Development (OED), allows for a central point of contact between city departments as well as a liaison for external partners and stakeholders on all Downtown-related matters. COMMUNITY AND ECONOMIC DEVELOPMENT COMMITTEE June 19,2017 Subject: Downtown Development Update Page 2 Framework for a Vibrant City Center Over the past eleven months, Downtown San Jose has enjoyed significant positive momentum due to its growing amenities, proximity to transit options, and attractiveness to a highly talented workforce. Based on the most recent demographic data available (2014), Downtown has a higher concentration of Millennials than the city as a whole, and has seen faster population growth than the rest of the city (4.2% versus 1.2% growth). Forty percent of Downtown households have disposable income over $75,000 and Downtown boasts 180 tech companies and has 1,138 residential units under construction. The distribution of Downtown businesses by sector is approximately 34% professional services; 22% real estate; 21% retail; 8% tech; and 15% general commercial, non-profit and government. The Downtown Strategy 2040 EIR is a critical update currently underway that will evaluate the impacts of construction of Downtown development projects at a program level to approximately 2040. The Downtown EIR will enable an increase in both commercial development (up to 15.6 million square feet and 3,600 hotel rooms) and residential development (up to 14,360 units) in the approximately three square miles bounded by Taylor Street, San Jose State University, Interstate 280 and the Diridon Station Area. The Downtown Strategy EIR is scheduled for completion this year. ANALYSIS Work Environment There are approximately 40,000 jobs in Downtown San Jose. The vacancy rate for Class A office space is quickly dwindling. According to Q1 data from Cushman and Wakefield, Class A vacancy currently is 10.8%, a level that hasn’t been achieved since 2008. This leaves only 434K COMMUNITY AND ECONOMIC DEVELOPMENT COMMITTEE June 19,2017 Subject: Downtown Development Update Page 3 square feet available. The average rate for Class A office space is $3.5/square foot. The Class B vacancy rate is a bit higher at 15.7%, creating an overall commercial vacancy of 13%, with a market rent range of $1.25 -$4.50. New investors have entered the Downtown market, purchasing buildings that have long languished in the heart of the commercial core. These investors are committed to rehabilitating and re-tenanting their newly purchased buildings and share the city’s Downtown vision. Most notably, Lift Partners purchased all but one of Saratoga Capital’s Downtown commercial holdings, including 100,000 sq. ft. at the corner of First and Santa Clara streets and the building at the corner of Second and Santa Clara streets. Lift Partners now owns five Downtown buildings. Divco West and local investor Gary Dillabough purchased 2 W. Santa Clara Street (Walgreens building) in March for $14.4M. Dillabough has also purchased 150 E. Santa Clara Street and the former Camera 12 building and ground lease with Imwalle Properties. Prominent leases executed over the past year include co-working leader WeWorlc taking 75K sq. ft. at the corner of Second and Santa Clara streets. Amazon entered the Downtown market by moving an initial group of employees into 20K sq. ft. at WeWorlc. Unicorn start-up Okta set up shop in the long vacant RiverPark Tower 2 and software developer Wrilce relocated their headquarters from Mountain View to 10 Almaden. Zoom Video Communications, in 55 Almaden Blvd, is one of the fastest-growing Downtown companies with its valuation jumping fourfold in January to $1B, after receiving $100M in venture capital funding. Approved in 2014, the Diridon Station Area Plan (DSAP) allows for significant office, retail, hotel and residential development. Since December 2016, Trammell Crow and affiliates acquired several properties in the central zone of the DSAP. On June 6 the City announced its intention to enter into an exclusive negotiating agreement with Google for acquisition of properties owned by the City of San Jose and properties owned by the Successor Agency to the Redevelopment Agency in the Diridon Station Area for the potential future construction of 6M- 8M sq. ft. of mixed-use, transit- oriented development. San Jose State University (SJSU) is Downtown’s largest employer and land owner and the nation’s largest urban university in a major city. SJSU inaugurated its new president, Mary Papazian, on May 4 and officially began a new chapter in the relationship between Downtown, the City of San Jose and SJSU. City and SJSU executives and staff have pledged a renewed commitment to strategic collaboration, planning, and communication. Urban Living There are approximately 10,000 residents living in the immediate Downtown core bounded by Fourth Street, Julian Street, and highways 280 and 87, and approximately 22,000 residents when these boundaries are extended further east and south. In order to realize its true potential as an active and vibrant urban core, Downtown must attract significantly more residents. Approximately 500 residential units opened in the past year: The Pierce, Donner Lofts, and 27 North student-oriented housing. An additional 1,138 units are currently under construction COMMUNITY AND ECONOMIC DEVELOPMENT COMMITTEE June 19, 2017 Subject: Downtown Development Update Page 4 including Modera and Silvery Towers in San Pedro Square, Marshall Squares in the Historic District, and Balbach Street condominiums in SoFA. In December the City Council approved an extension of the Downtown High-rise Incentive. The incentive allows developers, building 12 stories or higher, to benefit from a 50% reduction in parkland impact fees and construction taxes if their building permit is secured by July 2018 and certificate of occupancy secured by December 31, 2020. Completed August 2016 - June 2017 505 Currently Under Construction 1,138 Currently Entitled 3,311 Shopping and Dining While Downtown continues to build toward commercial and residential densities that will support more shopping activity, the Downtown dining scene is robust with more than 175 eating establishments. Overall, data collected by the San Jose Downtown Association (SJDA) shows that Downtown ground floor vacancy tends to hover between 11% and 12%, with a significant portion of this vacancy concentrated along Second Street, between Santa Clara and San Fernando streets. Together, the City’s Small Business Allies and OED’s and SJDA’s business development teams have assisted approximately 200 groundfloor business and property owners in the past eleven months. The following is a sampling of groundfloor activity in Downtown’s three primary districts: San Pedro District - The San Pedro Market welcomed new eateries Anchors and Coast Poke Counter. On Santa Clara and San Pedro streets, respectively, Five Points Bar and Olla Cocina debuted to rave reviews. District from San Francisco will move into a prime restaurant location on San Pedro Street that was formerly occupied by Black Arrow Technology. A Proper Cup, the first retail business to open in a recently constructed highrise, opened in May at One South Market. SoFA District - Perennial favorite Ben and Jerry’s closed its doors after more than 15 years, but Tac-Oh! Mexican comfort food, Forager Tasting Room & Eatery, and Uproar Brewing Company have opened on South First Street. In the SoFA Market, Toasted and Pizzetta 408 opened this year leaving only two spaces to be filled of 11 in the market hall. Tenants for these two spaces have already been identified. Historic District - Blue Bottle Coffee announced they will move into 1 W. Santa Clara Street. Blacksuit Tattoo opened on S. Second Street in the Western Dental building and Local Color, a pop-up San Jose artists’ collective, has set-up shop in former Ross Dress for Less space at 27 S. First Street. TechShopSJ relocated and expanded into to a permanent space at 38 S. Second Street (former Zanotto’s Market) and WestCA gym has transformed the former Sperry Flour Company building at Third and Santa Clara streets. Baja Fresh on the Paseo de San Antonio closed its doors in May and Carl’s Junior on S. First Street a few months prior to that. A new tenant has already leased the Baja Fresh COMMUNITY AND ECONOMIC DEVELOPMENT COMMITTEE June 19,2017 Subject: Downtown Development Update Page 5 space. Common Grounds and InVita Cafe have committed to the never-before-leased ground floor of The Globe on Second Street and just two doors north owners of Paper Plane and Original Gravity will embark on their third Downtown concept. Fuz Bar & Grill opened at 58 S. First Street this Spring. OED staff attended the regional International Conference of Shopping Centers (ICSC) conference in Monterey to continue to foster ties with the retail broker community.