Frustrated by years of deteriorating demand, officials in Silicon Valley's largest city are experimenting with a different approach in an attempt to fill a record amount of available office space.
San Jose, California, a South Bay hub surrounded by some of the world's most valuable tech companies, is prepared to offer prospective office tenants a myriad of incentives aimed at juicing the city's stagnant leasing pipeline and aiding economic development efforts that have struggled since the onset of the pandemic nearly half a decade ago.
The proposal would provide downtown office tenants perks such as free parking and tax breaks, something San Jose Mayor Matt Mahan said were part of the city's broader plan to help speed up its downtown recovery.
“We’re doing what we can to entice office users to lease or buy commercial space downtown,” the mayor said in a statement. “We need to encourage small businesses and others to move into downtown and take advantage of what is probably, in some ways, a more robust experience economy than we’ve ever had."
Officials in Pennsylvania, California, Colorado, Nebraska, Massachusetts and Washington, D.C., are responding to record-high office vacancy rates that have decimated central business districts with similar strategies to stem the drain on city coffers and multimillion-dollar deficits.
In San Jose, the vacancy rate has soared to about 26%, according to CoStar data, a figure that has worsened in recent years as corporate tenants have offloaded space and leasing demand — like elsewhere across the country — remains at just a fraction of what it was prior to the pandemic.
Those issues have a cascading effect across local economies, prompting some legislators to acknowledge that without some form of aid or financial incentives, the problems won't be going away anytime soon.
Aiming for 'a healthier mix'
In San Jose, the impacts of remote work and fewer employees regularly commuting to an office have meant the sidewalks and ground-floor businesses are far emptier than they were prior to the pandemic's 2020 outbreak. While downtown's nightlife and restaurant scene has largely recovered, Mahan said that isn't enough to support a sustainable economy.
“That is much needed revenue for small businesses that can’t survive on the night and weekend traffic alone,” the mayor said.
The San Jose City Council is scheduled to vote on the proposed incentives at its meeting next week. If approved, they would take effect next year and are estimated to cost the city about $120,000 in lost business tax.
Office tenants would be eligible for the tax breaks if they lease at least 2,500 square feet for four or more years. The tax breaks would be calculated based on a company's local headcount. For example, an office with 500 employees could get an annual business tax break of about $30,000, according to city estimates.
Companies that already have locations in the city's downtown and are either renewing or expanding their existing footprints will not be eligible for the proposed perks.
While the incentives will carry a price tag for the city, it's an investment Mahan said is crucial to rebuilding foot traffic throughout the day.
“If we want to have a vibrant restaurant scene downtown [and] we want coffee shops that survive and those types of amenities, we’re going to need to have consistent foot traffic," he said. "That means a healthier mix of office workers and residents.”