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Erik HaydenSep 8, 2023 10:42:02 AM16 min read

San Jose has quietly become Silicon Valley’s all-around strongest multifamily submarket

California, mired in a decades-long housing crisis, is one of the world’s most expensive places to live. The state’s cities and towns don’t approve nearly enough housing annually; then-gubernatorial candidate Gavin Newsom pledged in 2017 to lead efforts to develop 500,000 new housing units a year over the next eight years, but in 2021, local governments issued permits for less than a quarter of that annual goal. Combine that with geographical constraints — mountain ranges and bodies of water make up a good portion of Northern California’s topography, limiting the region’s inventory of developable land — and you have a severely supply-constrained housing market in which it’s also prohibitively expensive to build new homes.

None of this is good for our society; elevated rents and dozens of people competing for the same vacant apartment result in existing renters being forced to relocate to more affordable cities and towns. Yet when it comes to multifamily property owners and prospective investors in ground-up development projects, particularly those looking at the city of San Jose, there are several good reasons to be optimistic about the future.

An area including North San Jose leads Silicon Valley in net absorption, the difference between the number of units occupied and vacated. Four of San Jose’s five submarkets equal or exceed Silicon Valley’s average year-over-year change in per-unit rent. Three of the city’s submarkets top the Bay Area’s average multifamily occupancy rate, one of which — North San Jose/Milpitas — leads the Bay Area in that category.

The results are in, courtesy of commercial real estate firm CBRE’s latest quarterly numbers: San Jose is Silicon Valley’s all-around strongest multifamily submarket. The following is some data to back up my point:

Bay Area Submarket Rankings — Q1 2023
The North San Jose/Milpitas submarket led the Bay Area in average occupancy in Q1 2023. (Source: CBRE)

Silicon Valley multifamily market — Absorption
North San Jose/Milpitas, South San Jose, and the West San Jose/Campbell submarkets were among the top 5 Silicon Valley submarkets by net absorption year-to-date, according to CBRE’s Q3 2023 Bay Area multifamily report. (Source: CBRE)

Bay Area Submarket Rankings: Rent
The North San Jose/Milpitas and East San Jose submarkets ranked second and third in year-over-year rent change among 25 Bay Area submarkets. (Source: CBRE)

North San Jose supply constraints

The North San Jose/Milpitas area ranks first in Silicon Valley in net absorption, first in the Bay Area in average occupancy, and second in the Bay Area in year-over-year rent change, CBRE’s latest multifamily data show. A big reason why: No housing has been built in North San Jose in over a decade due to restrictions stipulated in a 2006 agreement between the county and cities of Milpitas, Santa Clara, and San Jose. Although San Jose and Santa Clara County reached another agreement at the end of last year to clear a path for thousands of additional homes in North San Jose, it will take decades for those homes to be approved and even longer for them to be completed.

The upshot: Now is as good a time as ever to invest in multifamily housing around the North San Jose/Milpitas border.

Central San Jose’s construction boom

Multifamily investors should keep the rest of San Jose on their radar, too, as the market fundamentals in the city’s other submarkets offer reasons for optimism. Take Central San Jose, which includes Downtown San Jose and the surrounding area — the site of our Aquino and Echo multifamily projects. In 2021 and 2022, net absorption averaged 764 multifamily units in Central San Jose — ranked second out of nine Silicon Valley submarkets, only behind Mountain View, Palo Alto, and Los Altos. Central San Jose’s average net absorption over the previous 10 years was 300 units, showing how successful the area has been in attracting new residents or ones who moved out in the first year of the pandemic. 

San Jose — Absorption (CBRE)
Total net absorption in Central San Jose between 2021 and Q2 2023 exceeded the rest of the submarkets in Silicon Valley's multifamily market. (Source: CBRE)

Given how solid Central San Jose’s net absorption numbers are looking, it’s no surprise that multifamily construction has been busier there than anywhere else in Silicon Valley in recent years. As the graph below shows, developers completed more than 1,200 multifamily units in Central San Jose between 2021 and last year, the most in Silicon Valley during that time, according to CBRE.

San Jose — Deliveries
The number of multifamily deliveries in Central San Jose is on track to exceed last year’s total. (Source: CBRE. Year-to-date totals shown above are through Q2 2023).

New multifamily deliveries tend to put upward pressure on average asking rents, meaning investors looking for multifamily submarkets to place cash may want to look into Central San Jose as an attractive investment opportunity. We at Urban Catalyst recently launched a new fund to finance the development of a ground-up apartment project in the area. I suggest you contact us today if you're interested in learning more about our 272-unit development, Aquino, and our UC Multifamily Equity I fund.

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The contents of this communication: (i) do not constitute an offer of securities or a solicitation of an offer to buy securities, (ii) offers can be made only by the confidential Private Placement Memorandum (the “PPM”) which is available upon request, (iii) do not and cannot replace the PPM and is qualified in its entirety by the PPM, and (iv) may not be relied upon in making an investment decision related to any investment offering by an issuer, or any affiliate, or partner thereof ("Issuer").

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THIS PRESENTATION IS neither an offer to sell nor a solicitation to buy securities. The offering and sale of interests in uc multifamily equity i llc (“ucme”) is only being made and can only be made by delivery of ucme’s private placement memorandum (“ppm”), CERTAIN ORGANIZATIONAL DOCUMENTS, SUBSCRIPTION AGREEMENT AND CERTAIN OTHER INFORMATION TO BE MADE AVAILABLE TO INVESTORS (“OPERATIVE DOCUMENTS”) BY UCME’S SPONSOR.

This Presentation is for informational and discussion purposes only and is not, and may not be, relied on in any manner as legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to purchase any securities of the Fund.  Any such offer or solicitation shall only be made pursuant to the final confidential PPM (as amended or supplemented from time to time, and including the subscription agreement attached thereto, the “Subscription Package”) and the Fund’s Operative Documents, which will be furnished to qualified investors on a confidential basis at their request and should be reviewed in connection with any consideration of an investment in the Fund.  This Presentation does not constitute a part of the Subscription Package and no person has been authorized to make any statement concerning the Fund other than as will be set forth in the Subscription Package and any representation or information not contained therein may not be relied upon. The information contained in this Presentation must be kept strictly confidential and may not be reproduced (in whole or in part) or redistributed in any format without the express written approval of Urban Catalyst Manager IV LLC (the “Manager”). By accepting this document, the recipient agrees that it will, and will cause its representatives and advisors to, use the information only to evaluate its potential interest in the Fund and for no other purpose and will not, and will cause its representatives and advisors not to, divulge any such information to any other party.  Neither the Fund nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the information contained herein and nothing contained herein should be relied upon as a promise or representation as to past or future performance of the Fund or any other entity. Any potential investor considering an investment in the Fund that is on behalf of an employee benefit plan or individual retirement account (or governmental, church, or foreign plan subject to laws similar to those governing employee benefit plans and individual retirement accounts) is strongly encouraged to consult with its own legal and tax advisers regarding the consequences of such an investment. A prospective investor may only invest in the fund if such person is an accredited investor as defined in rule 501 of regulation d. Investing in the fund will involve significant risks, including possible loss of such person’s entire investment.

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Erik Hayden

Responsible for developing more than $3.5 billion in real estate projects, including over 2,300 residential units in the California Bay Area, Mr. Hayden has experience in acquisition, contract negotiation, due diligence, risk assessment, financing, construction, and disposition of multifamily, single family and large mixed-use and master planned developments. He maintains relationships with a broad network of property owners, enabling him to identify and acquire prime investments. Mr. Hayden also has expertise in navigating projects through the entitlement process by working with elected officials, community groups, and political organizations to gain support and get projects approved.

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