Google Effect: Search giant spurs downtown San Jose boom

SAN JOSE — Even before Google has begun construction on its proposed massive transit village in San Jose, the search giant’s property purchases have helped catalyze a frenzy of development plans that could dramatically reshape the city’s downtown.

Most striking is the dramatic surge in proposed downtown San Jose office space: from no new office development proposed in 2016 — before Google began snapping up properties for its project — to more than 1 million square feet proposed in 2017, and another 4.3 million square feet proposed in 2018, according to a survey of city planning documents through mid-December by this news organization.

With all those new workers potentially heading downtown — Google’s project alone calls for up to 20,000 employees — housing and retail proposals have blossomed.

Younger tech employees’ shifting attitudes about where they want to work and live appears to be adding some momentum to downtown’s development.

“Maybe the tide is finally changing,” said Jerry Strangis, principal executive with Strangis Properties. “Maybe that kind of workforce that has been missing downtown is finally here. The millennial generation of 20-somethings wants to experience and enjoy a downtown scene and an urban setting.”

Developers often refer to the real estate impact from Google’s plan as “the Google effect.” But while the technology giant is a key factor behind the surge in activity, there are other ingredients fueling the boom, including plans for more transit links, pro-development policies, rising property values and Bay Area job growth.

“Google is very helpful, but they are only part of the story,” San Jose Mayor Sam Liccardo said. “We have had decades of policies designed to build more transit, develop more high-density residential, more office buildings, more restaurants, more amenities in downtown San Jose.”

Diridon Station — already a hub for light rail, Caltrain, Amtrak, the Capitol Corridor line and the ACE Train — is poised to become a future Bay Area Rapid Transit station.

“If downtown San Jose were a living organism, the transit system is the skeleton,” said Carl Guardino, president of the Silicon Valley Leadership Group, which has pushed for numerous transit financing measures for the Bay Area and the South Bay. “The muscles will be the jobs coming downtown.”

Rising property values for offices, housing and hotels have also made development projects more attractive, while federal tax cuts have spurred business investments.

After Google’s transit village plan was announced, Adobe Systems, the first major tech company to place its headquarters in downtown San Jose, announced it has decided to “double down” on the downtown by adding a fourth office tower to its campus on the banks of the Guadalupe River.

“As an early pioneer to downtown San Jose, we continue to see opportunity for innovation and investment in the area,” said Jonathan Francom, an Adobe vice president employee and workplace solutions. “We will be expanding in downtown San Jose, which will provide capacity to roughly double our current headquarter employee population.”

Property buyers also have jumped into the fray. Over the 12 months that ended in September, tech companies and realty investors mounted a $1.43 billion shopping spree for downtown properties, far outpacing the $484 million buyers spent on downtown properties over the prior one-year period that ended in September 2017.

“My family has been downtown forever, and this is the strongest I’ve ever seen it,” said John DiNapoli, president of J.P. DiNapoli, a veteran development firm. “This is the most activity I’ve seen.”

The cascade of interest suggests that downtown San Jose could finally be on the verge of a transformation that could land the city some of the Silicon Valley mojo that has brought jobs and wealth to neighboring cities such as Mountain View, Palo Alto and San Francisco.

“The economic upturns in the Bay Area bypassed downtown San Jose,” said Bob Staedler, principal executive with Silicon Valley Synergy, a land-use and planning consultancy. “Downtown has always needed a push. Google is providing that push, is causing more velocity, and making more people look at the downtown.”

The development rush is happening as Google plans for 6 million to 8 million square feet of office space, retail and housing on a 240-acre site near the Diridon Station. Google, directly or through an investment partnership, has bought 51 parcels, paying a combined $310.1 million and now owns a swath of land stretching from north of the SAP Center southward to an old Orchard Supply Hardware store near Interstate 280.

“The amount of money and investment pouring into the downtown is the highest it’s ever been. It’s at an insane level,” said Nick Goddard, a vice president with the Colliers International commercial real estate firm. “Companies like Google and Adobe are looking at their long-term growth. They realize that traffic is only going to get worse. So they want to move staff up and down the Caltrain line, and eventually up and down the BART line.”

As office plans have multiplied, housing proposals for the area have also surged, from 954 residential units proposed in 2016 to 3,848 units in 2018. Downtown retail-development plans have soared too, from 6,900 square feet in 2016 to 101,000 square feet in 2018.

Perhaps the most iconic property acquired in the current buying binge is the Fairmont San Jose hotel, an 805-room double tower that an East Bay investment group bought for $223.5 million in January. Sobrato Organization, a developer, has begun constructing offices for Santa Clara County agencies; Boston Properties has inquired about building three office towers; TMG Partners and Valley Oak Partners are contemplating 1 million square feet of offices near transit.

At Park Avenue and South Almaden Boulevard, a long-stalled development has gained new life with a proposal from the DiNapoli firm for a sleek, 20-story office tower totaling 740,000 square feet.

Museum Place — a mixed-use project of offices, hotel rooms, housing and an expansion of the Tech Museum of Innovation — has been revived with a fresh investment led by Gary Dillabough, who has also made a splash with plans for a high-profile renovation of the landmark Bank of Italy building and upgrades of other older buildings downtown.

“We have the Google effect on the west side of the downtown and the Dillabough effect on the east side,” said Mark Ritchie, president of the San Jose-based Ritchie Commercial realty firm.

The changes can unleash far-reaching transformations in an office market like downtown San Jose because it is so compact, Ritchie said. Brokerage companies estimate that downtown San Jose’s office market totals 10 million square feet compared to Oakland, which has about 14 million square feet of office space, or downtown San Francisco with 72 million square feet.

“When change happens in a downtown as small as San Jose’s it will be felt much more greatly and more quickly,” Ritchie said.

Some small-business executives downtown welcome the changes, such as Joe Horrigan, general manager of San Pedro Square Market.

“I think the Google project is great for downtown,” Horrigan said. “I go to Mountain View for the movies, and Google has created a lot of walkable places around its headquarters. The same thing can happen here with the train station. San Pedro Square continues to grow. You have all of these residential projects like Silvery Towers right behind us. You have Google, Amazon, Adobe all expanding here.”

Dillabough, however, has some reservations.

“It’s almost as if the hype over Google is driving too much speculation in the marketplace,” Dillabough said. “We are actually starting to back away from some properties. Owners have gotten too enthusiastic about what they can sell their buildings for.”

To be sure, the success — or even construction — of these downtown projects is far from certain. A job slump or a cooling commercial real estate market could hobble new development activity.

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‘I want to see the Valley step up:’ Gov. Newsom pressures companies to help build housing Already, the boom in property values has alarmed Silicon Valley Rising, a coalition of community groups. The organization is pressuring Google and San Jose city leaders to ensure that Google’s planned expansion will benefit middle- and low-income workers, not displace them.

“The Google project would affect the entire city of San Jose,” said Ben Field, executive officer of the South Bay Labor Council, which is part of Silicon Valley Rising. “The community wants Google to come to downtown San Jose, but only if they provide the community benefits to prevent people from being evicted and becoming homeless.”

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