Luxury high-rise boom makes downtown San Jose a millennial magnet

SAN JOSE — Mike Kim walks out onto the seventh-floor patio of Centerra, a swanky, 21-story apartment complex, taking in the bird’s-eye view of downtown’s rapidly changing skyline.

It’s clear from up here that downtown San Jose is ascendant, with activity in all directions: cranes swinging, bulldozers digging. Silicon Valley’s technology companies have created more jobs in recent years, fueling new residential and mixed-use construction. Now, as developers build more high-rise housing with luxury amenities — the most downtown has ever seen — they expect the well-heeled residents moving in will lure more restaurants and coveted retailers.

“It’s happening,” says Kim, chief investment officer for Simeon Properties, which opened Centerra in 2016. “The housing production is happening. The services are starting to come, and if we can sustain it, we can become an 18-hour city,” he says, meaning that downtown’s sidewalks might one day stop rolling up at 6 p.m. “I don’t want to predict, but we can get there — eventually.”

Then he mentions the downside of the current building boom: Construction and labor costs are increasing, financing has tightened, rents have plateaued. Downtown San Jose’s luxury housing generally gets built in response to new jobs. But while Silicon Valley’s job market has enjoyed a strong recovery from the recession, the area’s job growth has been up and down these last few months.

“The party can’t go on forever,” Kim observes with a shrug.

But right now, the party is on.

Transit-rich, adjacent to freeways and with parks, museums and theaters already in place, the approximately 250-square-block downtown core — with rents lower than San Francisco and more or less on par with Oakland — appears poised to become a new urban destination for millennials and the tech crowd.

Five projects have lately broken ground and — to use the parlance of developers — are now “going vertical,” bringing about 1,300 apartments and condos to the neighborhood. Beyond that, as many as 20 projects with about 6,000 units are in the pipeline, recently approved or under review by City Hall.

Just how many of the planned projects will move forward remains to be seen, as developers are constantly reassessing the marketplace. Still, all this activity potentially dwarfs the previous wave of downtown high-rise development, which came right before the crash of 2008 and brought just over 900 units to the neighborhood. Prior to that, new downtown housing projects had been low-rise, mid-rise — and sporadic, though there have been waves of office tower development going back decades.

As the cityscape changes yet again, the Centerra patio perch looks down on a wide swath of the new San Jose.

Straight ahead is San Pedro Square Market and its trendy eateries, ground zero for downtown’s growing population of millennials. Over to the left, the twin Silvery Towers — recently taken over by a Chinese development firm known as Full Power Properties — is on the rise and will house 643 condominiums. Going up to the right of the market is the Modera, with 204 apartments, and farther to the right of that is the dreary old Greyhound bus terminal, awaiting demolition and replacement by a 781-unit luxury high-rise.

Four luxury complexes with more than 1,100 units opened in the last year, and occupancy rates are high — approaching 95 percent at Centerra, where most tenants are in their mid-20s to early 40s and work in tech. They pay between $2,500 and $3,780 monthly for apartments that come with hotel-style amenities including a full gym, heated swimming pool, and “barbecue zone.”

“We wanted a feel where it was young, hip kind of people in a fun, young area where we could walk to things,” says Tamara Sam, 38, a marketing strategist and Centerra resident since March, when she and her fiancé left Toronto for new careers in Silicon Valley. After looking at 25 apartments up and down the Peninsula and South Bay, the couple settled on downtown San Jose: “We’re walking to restaurants, we’re walking to bars, and a big deal for me is being close to transit,” says Sam, who walks to Caltrain at nearby Diridon Station.

The neighborhood hasn’t entirely shed its stigma as a place that’s both grubby and dull, though. Sam says downtown still lacks quality retail, a decent choice of movies – the Camera 12 cinema recently shuttered – and, basically, Toronto’s buzz.

“It seems this is a more transient city, where people come in for the Sharks game and then go away,” Sam says. “And where are the outdoor hangouts? Where’s the people tossing Frisbees and having picnics in the park? Is that not a thing here?”

Just a few blocks from Centerra, St. James Park is a hangout for homeless people, and stretches of Santa Clara Street are marked by boarded-up storefronts. But those buildings soon enough will get scooped up by developers, predicts Prashant Vanka, 28, a real estate agent and house flipper who lives at Centerra: “I just see a ton of growth coming — the potential for it,” he says.

A mixed-use project planned near Diridon Station includes 1 million square feet of office space, retail and 325 apartments. High-end Blue Bottle Coffee – a magnet for hipsters — plans to open an outlet at the corner of First and Santa Clara streets.

All in all, downtown is seeing “interest from commercial developers in a way that it hasn’t in the past,” says Laura Tolkoff, San Jose policy director for SPUR, the San Francisco Bay Area Planning and Urban Research Association.

Blage Zelalich, downtown manager in the San Jose Office of Economic Development, notes that downtown has been through previous boom-and-bust cycles. It remains “episodic in terms of having the vibrancy and the energy — the hustle and bustle of what you think the center of a city with a million people is like. We still have a relatively small office workforce,” she says, “just 35,000 to 45,000 workers.”

By contrast, downtown Oakland has about 85,000 jobs, while downtown San Francisco has around 350,000, according to SPUR.

San Jose City Hall offers periodic incentives to developers, including tax reductions, to encourage residential construction. Even so, only about 10,000 people live in the downtown core, or about 22,000 when the boundaries of downtown are broadened to include San Jose State University and the area around Diridon Station. It’s anyone’s guess as to when there will be enough feet in the street to create a big-city vibe.

Yet downtown is steadily “heading toward more and more density,” says Paul Zeger, partner with Polaris Pacific, the San Francisco-based real estate sales and marketing firm. With the next wave of residential construction, he predicts, “the critical mass will be stabilized in San Jose’s urban core to the point that this is a place where people want to be.”

A missing element in the discussion is affordable housing. Not much has been built or planned, even though downtown is home to a sizable population of university students. Lenders and developers say that’s because high-end housing generates the investment returns required to take on the years-long process of planning and building projects that typically cost more than $100 million.

A “fairly long runway” is required for such projects, says Ken Tersini, principal of KT Urban, a major downtown developer. And with construction costs rising, he adds, “returns are still really nebulous, and it’s keeping a lot of activity on the sideline right now.”

There’s “nobody in the real estate business that thinks this cycle will last forever,” cautions Drew Hudacek, chief investment officer for the Sares Regis Group, which built The Pierce, a luxury mid-rise complex with 230 units that opened in the SoFA district this year. He suggests that downtown is best thought of as “a living organism” that has its ups and downs “and is doing great right now.”

Remember, he says, “Every new building is a step toward more vibrancy.”

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